This Financial Guide tells you how to begin the financial planning process. It provides worksheets to help you find out where you are financially and where you want to be in the future. It will help you identify your goals, determine your net worth and cash flow, plan to achieve your goals as well as begin to put your plan into action.
Financial security derives not only from acquiring more money but from planning. A solid financial plan can alleviate financial worries about the future and ensure that you will meet your financial goals - whether they relate to retirement, asset acquisition, education, or just vacations.
Review your financial plan every year to keep it up to date. If you set it up properly initially, it is relatively easy to review and keep current.
This Financial Guide allows you to take the first step towards a solid plan. By following the instructions and guidelines contained in it, you can find out where you are now and how you can put your plan into action.
There are many ways to approach setting up a financial plan. The one outlined in this guide is just one of a number of approaches. Your financial advisor can assist you in setting up the financial plan that best meets your particular situation and needs.
Identify Your Goals
Spend some time thinking and talking with family members about what you would like to achieve financially. What would make you and them happy? What would be fulfilling? Would you like to start your own business? Retire early? Acquire a vacation home? Pursue a hobby? Travel?
Perhaps you'd like to change careers, and you'll need money to finance an education in a different field. Or perhaps you'd like to have a large amount of money to give to your favorite charity. Once you've got some idea of what you'd like to accomplish, fill out the Goals Worksheet below.
The "Goals" section should state what you'd like to accomplish. Be as specific as possible, e.g., instead of writing "Acquire a bigger home," write "Acquire a home with at least 12 rooms in Anytown."
The "Amount Needed" should be an estimate of the amount of money you'll need. For instance, to retire early, you might estimate that you'll need a $1,000,000 nest egg by the time you reach age 50, or to buy a vacation home, you might estimate that you'll need a $50,000 down payment.
The "Target Date" section should include the approximate year or, in the case of short-term goals such as a vacation in the current year, the month in which you would like to achieve your goal.
| Goals | Amount Needed | Target Date |
|---|---|---|
| $ | ||
| $ | ||
| $ | ||
| $ | ||
| $ | ||
| $ | ||
| $ | ||
| $ | ||
| $ | ||
| $ |
Determine Your Net Worth
Your financial plan should include an inventory of the existing financial resources you'll be using to achieve the goals you decided on above.
Fill out the personal statement of net worth below. This will enable you to estimate the value of everything you own, minus the value of your debts. When asked for a value, use what the property would fetch if you sold it today at its market value.
It may take some time to do this, but the effort will be worth it. This is the foundation for your financial plan.
FINANCIAL STATEMENT
Date:
ASSETS (Current Value)
| Category | TOTAL | SELF | SPOUSE |
|---|---|---|---|
| Checking accounts | $ | $ | $ |
| Savings accounts | $ | $ | $ |
| Brokerage accounts | $ | $ | $ |
| Money market accounts | $ | $ | $ |
| Certificates of deposit | $ | $ | $ |
| IRA accounts | $ | $ | $ |
| Keogh accounts | $ | $ | $ |
| 401(k) plans | $ | $ | $ |
| Pension plans | $ | $ | $ |
| Other retirement accounts | $ | $ | $ |
| Life insurance (cash values) | $ | $ | $ |
| Annuities | $ | $ | $ |
| Bonds (government) | $ | $ | $ |
| Bonds (corporate) | $ | $ | $ |
| Mutual funds | $ | $ | $ |
| Stocks | $ | $ | $ |
| Other securities | $ | $ | $ |
| Money owed to you | $ | $ | $ |
| Home | $ | $ | $ |
| Other real estate | $ | $ | $ |
| Automobiles | $ | $ | $ |
| Household furnishings | $ | $ | $ |
| Jewelry | $ | $ | $ |
| Other assets | $ | $ | $ |
| Total Assets | $ | $ | $ |
LIABILITIES (Current Value)
| Category | TOTAL | SELF | SPOUSE |
|---|---|---|---|
| Home mortgage | |||
| Other mortgages | |||
| Automobile loans | |||
| Credit card balances | |||
| Installment accounts | |||
| Contractual obligations | |||
| Money owed to others | |||
| Income taxes | |||
| Pledges | |||
| Other debts | |||
| Total Liabilities | |||
| Total Assets (from above) | $ | $ | $ |
| Less Liabilities (from above) | $ | $ | $ |
| Net Worth (Assets less Liabilities) | $ | $ | $ |
This statement should be reviewed to determine which assets are available to achieve the goals you listed above. If most of your net worth is tied up in your home and personal use assets (such as furniture and cars), you may not be able to achieve your goals. Which assets are available to invest towards your goals? Are they sufficient? If not, you may need to liquidate other assets or start a savings plan out of your cash flow to come up with the necessary funds.
Determine Your Cash Flow
Once you've completed the net worth statement, fill in the cash flow statement below. This will give you an estimate of what you earn per year-your salary, investment income, and retirement income and what your current expenses are. To fill out this form, it will help to have on hand your check register and one year's worth of credit card receipts.
Here's why the cash flow statement is so important: once you know how much is coming in and how much of it is going out in the form of expenses, you can start to make adjustments in your discretionary expenses in order to meet your saving and investment goals.
CASH FLOW STATEMENT
Period: to
Income
| Category | Total | Self | Spouse |
|---|---|---|---|
| Salary/Wages | $ | $ | $ |
| Interest/Dividends | |||
| Social Security | |||
| Retirement Plans | |||
| Reimbursements (only if included as an expense) | |||
| Sale of investments | |||
| Other income | |||
| Total Income | $ | $ | $ |
Expenses
| Category | Total | Self | Spouse |
|---|---|---|---|
| Savings (including pension plan contributions) | |||
| Income taxes | |||
| Property taxes | |||
| Insurance (health, disability, life, car, home) | |||
| Mortgage/rent | |||
| Other debt payments | |||
| Utilities (heat, electric, water, garbage, phone) | |||
| Transportation | |||
| Vacation | |||
| Medical (other than insurance) | |||
| Personal (small cash expenditures, such as haircuts) | |||
| Charitable contributions | |||
| Food | |||
| Restaurants | |||
| Recreation | |||
| Holiday expenses | |||
| Gifts | |||
| Education | |||
| Clothing | |||
| Other (children, professional fees, hobbies, etc. - if large expenditures, create a line item for each) | |||
| Miscellaneous | |||
| Total Expenses |
Omit one-time, non-recurring items as they should not be used for budgeting or future planning.
How much cash flow is available to accumulate assets for the goals identified above? Is it sufficient in combination with your available assets from your net worth statement? If not, you need to examine the above expenses in detail and cut back on those which are discretionary until sufficient cash flow is identified.
Plan To Achieve Your Goals
Once you know your goals, net worth, and cash flow, you can create a plan to achieve your financial objectives. This involves budgeting, saving, investing, and managing risks.
- Create a budget that allocates funds toward your prioritized goals.
- Build an emergency fund covering 3-6 months of expenses.
- Invest wisely according to your risk tolerance and time horizon.
- Review and adjust your plan regularly to stay on track.
Establish How Much You’ll Need
Estimating how much money you will need to achieve your goals is essential for effective planning. Consider factors such as inflation, expected returns on investments, and the timeline for each goal.
Use the following steps:
- Estimate the cost of each goal in today's dollars.
- Adjust for inflation to find the future cost.
- Determine how much you need to save or invest monthly or annually.
Example: If you want to save $50,000 for a home down payment in 5 years, assuming 3% inflation:
Future Value = Present Value × (1 + inflation rate)number of years
Future Value = $50,000 × (1 + 0.03)5 ≈ $57,963
Put The Plan Into Action
How Does Asset Allocation Work?
Using computerized formulas, asset allocator's take down information they glean from a questionnaire you have filled out. This information gives them what they need to become familiar with your needs, constraints, and unique circumstances. The following factors should become apparent from the questionnaire.
- Your risk threshold (how much of your capital you are willing to lose during a given time frame),
- Your goals (whatever financial planning goals you and your family want to achieve), and
- Your investing time horizon (mainly, your age and retirement objectives).
In addition, the professional needs to consider how wealthy you are, what your income tax bracket is, how much of your portfolio needs to be kept liquid, and how often withdrawals will be made from the portfolio.
The allocator's goal now is to come up with the right blend of six or seven asset classes, in the right percentages, that will match your financial profile - your risk profile and time horizon.