What is a Financial Plan?
A personal financial plan is a written examination of your finances, including your income, asset evaluation, your liabilities, and your investments to determine both your current financial state and your future financial state. Financial plans are crucial for you to help assess whether you will be able to reach your financial goals and to decide the steps that you should implement in furtherance of them.
Financial planning should start early, however it can be started at any age in your life. When you begin saving while you are young, your money will have more time to grow. The purpose of a financial plan is to help you determine the feasibility of your goals and to understand the steps that you will need to take to reach them.
A financial plan should be comprehensive and include a number of elements like:
Financial goals
Statement of your net worth
Analysis of your cash flow
Strategy for retirement
Risk management plan
Tax planning
Investment plan
Estate plan
Creating a financial plan will take a bit of work, but the end results can be life-changing. Financial plans necessitate regular reviews and modifications throughout your life. You should modify your plan when you experience major life changes that could affect your goals such as the following:
Birth of a baby
Getting married
Getting divorced
Death in the family
Second or subsequent marriages
A new job
Track what you are spending
You should begin by tracking all of your expenditures for 1-2 months. Categorize your spending according to the purchase type or the store so that you can understand areas in which you might be able to cut back.
Track your purchases by the store
Use an app to track spending while you are on the go
Track as you go with an expense spreadsheet
Use separate accounts for spending and bills
Download your transactions from your bank and credit cards into a spreadsheet
Organize your financial records
The next step is to organize your financial records. You should gather all of your documents into one place and organize them. Some of the documents that you should gather include the following:
Bills
Bank statements
Pay stubs
Contracts
Credit cards
Investments
Retirement account statements
Auto records
Mortgage statements
Tax returns
Insurance records
Medical bills
Complete an evaluation of your assets to determine Net Worth
The next step involved with making a financial plan is to complete an asset evaluation and to determine your net worth. To do this, you will need to determine the market value of each of your assets. This is the price you'd be able to sell the asset for if you found a willing buyer.
Begin by taking an inventory of all of your assets and write them down. You can then look up the fair market value of all of your fixed assets. Determining the value of your intangible assets may require some more work. After you have valued all of your assets, you will then need to take an inventory of all of your income sources and your liabilities.
Write down all of the sources of income that you have so that you can see a monthly total. If your monthly amounts vary, use an average value of your earnings for the last six months. Finally, list all of your debts and total them. You can then determine your net worth by subtracting your liabilities from the value of your assets.
