Creating a sound, practical financial plan is critical to maintaining financial stability and reaching your goals. In addition to showing you where your finances are at a given moment, it provides a path to financial growth and comfort.
Key to developing an effective financial plan is evaluating your current situation. While your plan isn’t a static document, you’ll save yourself time if you create a firm foundation that can be easily altered as circumstances change. Reevaluate your financial plan when necessary, and at least once a year.
Cash Flow, Net Worth
A starting point for any personal financial plan is determining cash flow and net worth. For cash flow, evaluate your monthly income and expenses from all sources. You want to be cash-flow positive, with more money coming in than expenses going out. If you aren’t cash-flow positive, look for areas where you can reduce expenses, such as cutting back on shopping sprees or eating out, or increase income. If you are cash-flow positive, you can start building your savings to reach your financial goals.
Net worth is an important tool to ascertaining your overall financial condition. To determine net worth, first calculate all your assets and liabilities. Assets include cash, savings, investments, real estate, and personal property. Liabilities include all outstanding debt, such as the balances on your mortgage, auto loan, and credit cards. Your net worth is the difference between your assets and liabilities. The goal is to see continued improvement in your net worth year over year.
Next you need to manage risk. That’s where insurance comes in. Ensuring you have enough insurance coverage is critical to shielding your finances from unexpected occurrences. Individuals should carry (and must, in some cases) insurance for health, auto, homeowners, life, and disability.
You will also need a will or a living trust to ensure your financial wishes are carried out in the event you are incapacitated and cannot manage your finances. Power of attorney and a medical do-not-resuscitate order also fall under this umbrella.
Your financial plan should also include an emergency fund. An emergency fund offers a cushion against unexpected financial setbacks, such as job loss or serious medical condition, and should be liquid in the event you need to access it immediately. It ensures you’ll be able to stay on top of your finances for a certain period of time. Experts advise setting aside a minimum of three months’ expenses for your emergency fund.
Now that you’ve planned for short-term needs, add future financial goals to your plan. This might include a date by which you would like your house to be paid off, an age at which you can comfortably retire, vacations you would like to take, or an amount of money you would like to save for your children’s education.
If you feel you need help creating a plan to reach your financial objectives, call in an expert. Financial planners can show you ways to increase your cash flow and net worth and help you reach your financial goals.