6 Steps on Personal Financial Planning
Personal financial planning is important in order to create your own budget. Some experts believe that it will be good to have a personal budget when you are in debt. However, I will say that you will have to think about it even if you are not in debt! That is the real creative real estate investing strategy.
Yet, one point that you should know is that most people create budgets that do not really work. This is certainly a big mistake in personal financial planning. In most cases, this is because these people spend the money without thinking about the amount of money they can earn every month.
These six simple steps will point you in the right direction.
Personal Financial Planning: Step 1 - Track Your Household Net Worth
The net worth statement provides a picture of your financial position at a point in time. A household net worth statement will help you track your financial progress and can be used to establish a strategy to improve your goals and feel secure.
Simply put, the household net worth statement is the total value of what you own less the value of what you owe. By looking at your net worth statement you will be able to determine what your assets you own (such as your home, car, or investments) and how liquid those assets are. Similarly, a review of your liabilities (or debts) will show how debt affects your net worth and whether you have sufficient insurance coverage to cover your debts and provide for your family. The net worth statement also helps you identify problem areas and take steps to correct those problems.
Your net worth should increase annually. If your net worth is negative (and in your earlier years it can be negative!), then you must take steps towards debt reduction, increasing your assets, increasing your investment income and therefore your cash flow or revise your goals accordingly.
Your household net worth must be calculated annually and compared to the prior year if it is to provide any value in order to achieve your ultimate goal in achieving creative real estate investing.
Personal Financial Planning: Step 2 -Track And Manage Cash Flows
Your household net worth statement looks at a single period in time while your cash flow statement measures a period of time. The only way you can grow your household net worth is if your cash flows are positive or if you have savings. If cash outflows (i.e. your spending) exceed your inflows (income), then action must be taken to correct the situation either by increasing your cash flows in or reducing expenses.
Keep in mind that I have use the term cash flow as opposed to tracking your budget. Your cash flows may not always be timed the same as your expenses. By considering cash flows, you should be in a better position to cover the unexpected costs life throws at you. These can be your creative real estate investing;
Tips to improve cash flow:
- Reduce expenses: Eliminate discretionary items to ensure there is a workable long-term plan.
- Consolidate debt or refinance debt: Take a term loan, line of credit, or refinance your home and close un-needed high interest credit card accounts.
- Defer purchases of non-income producing assets: Defer the acquisition of non-income or negative cash flow asset acquisitions. Reduce, restructure, defer. This is the key is to reduce cash outflow and improve cash inflow.
The cash flow statement is used as a planning tool to look for opportunities to improve net worth.
Personal Financial Planning: Step 3 - Establish Your Goals
It may be easily argued that the establishment of goals should be the first step and if it suits your individual purpose, there is no reason why you couldn't do this step first. The overall objective is to establish what you want and how you are going to get there. Whether you first start with what you want or start where you are is a matter of personal preference.
What are your goals?
- Buy a home
- Take an exotic cruise
- Save for your retirement or you child's education
- Buy a vacation home
- Purchase a pool
- Buy an exotic car
Sit down with your partner and commit to paper a list of what you want to achieve. Categorize short-term and long-term goals and rank them in order of priority. You may need to make revisions allowing more time for some things and less time for others. Look at your cash flow statement and flexible expenses to determine if expenses can be reduced or eliminated. Look at your investment and determine if repositioning assets can enhance investment income.
Personal Financial Planning: Step 4 - Establish A Savings And Investment Plan
From your cash flow statement you will and goals you will see how much you will need to achieve your goals. It may be necessary to revise your budget and make adjustments to increase income or reduce expenses.
Any savings and investment plan should have the following elements:
- The goals must be realistic and attainable.
- Pay yourself first. Set up an automatic rep-authorized plan to divert funds into your savings.
- Avoid the use of consumer debt. In other words, avoid spending more than you make.
The reward for a disciplined and methodical approach to the plan is the attainment of your goal!
Personal Financial Planning: Step 5 - Cover Your Risks
Risk management is Events occur in life that are uncontrollable are those things that can affect us financially. These include loss of employment, accidents, property damage, health and illness, or death. To effectively manage these risks:
- Establish an emergency fund of approximately three months of income. A line of credit can be used rather than short-term investments that have lower rates of return. If unused, the line of credit costs nothing and your savings can remain invested in higher yielding investments.
- Any risks that cannot be covered personally must be covered by passing the risk on to a third party such as an insurance company. The level of insurance needed depends on your financial situation.
Insurance needs analysis varies based on the type of risk and policies available.
Personal Financial Planning: Step 6 - Review Your Plan Annually
Situations change and you should review and update your plan annually to see how far you have come. Did your net worth meet it target? Were you able to meet all of your goals? What circumstances are different?
Review, update and revise your net worth statement, cash flow statement, goals, and risks annually. Make revisions as required.
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