Creating a PersonalFinancial Plan
OverviewSetting goals are important and often used to measure success. However, simply setting goals does notensure you will someday accomplish them. Achieving goals requires establishing a plan. Planning isimportant to ensure a direction for your day-to-day actions. Being deliberate about establishing a plancan help guide the decisions you make to aid you in reaching your goals. The further your goals are fromtoday, the more important it is to have a plan to ensure your success in reaching those goals. Thinkabout it. You may not consult a map for a trip to the store across town, but you will probably wantdirections, or a plan, for a spring break trip to California.When it comes to personal financial goals, many can be long term. Paying off student loans, a new car,or a mortgage on a home does not happen in a month or even a year. Retirement is an even longerterm goal. When it comes to financial matters, planning can be of paramount importance. Creating apersonal financial plan has six basic steps:22.214.171.124.5.6.Determine your current financial situationDevelop your financial goalsIdentify alternative courses of actionEvaluate alternativesCreate and implement your financial action planReview and revise the financial planIt is never too early to begin planning. In fact, the earlier you begin planning for your financial future,the sooner you will reach your goals. Because of the nature of interest and compounding that can beassociated with investing, starting early can have great benefits. The longer your investments have togrow, the greater their growth will be. For instance, if you invest 5,000 today and receive a 6% annualcompounding interest rate, your investment will grow to approximately 10,000 within 12 years. Within24 years, the 5,000 investment would grow to 20,000 and within 36 years to 40,000. While a 5,000investment at that rate made at age 48 would only grow to 10,000 by age 60, the same investmentmade at age 24 would grow to four times that value by the same age. As you can see, it can certainly beadvantageous to get started planning for your financial future as early as possible.The worksheets on the following pages will help you navigate the six steps outlined above for creatingyour personal financial plan. Remember, your financial goals won’t be realized just by setting them.You have to be intentional about creating a plan and diligent in executing it. After all, directions to yourspring break destination won’t do much good unless you follow them.
Step #1:Determine Your Current Financial SituationBefore you can begin setting goals and developing strategies to achieve them, it is important tounderstand where you are now. The first step in creating your personal financial plan is determiningyour current financial situation. Having a thorough understanding of your current financial situationwill help you to formulate realistic and well-informed goals. Taking a detailed look at your situation mayalso help you identify specific changes you could make to change your situation and help you achievethe goals you will create later in the planning process.To gain insight into your current situation, it can be helpful to determine your current net worth. Tocalculate your net worth, you will need to total your current liabilities and subtract them from your totalcurrent assets. Assets are simply what you own that has value. These include: cash and cashequivalents, such as physical cash on hand, checking accounts, or savings accounts; personal property,such as equity in a home, other real estate owned, or a car; and invested assets, such as stocks, bonds,or pensions. Liabilities include value of what you owe including current bills and outstanding debt.Utilizing the charts below, calculate your current net worth.Liabilities (What I Owe)Assets (What I Own)Cash & Cash EquivalentsCurrent BillsCash on HandCharge AccountsChecking AccountCredit Card BalancesSavings AccountUtilitiesCDsRentLife Insurance ValueInsurance PremiumsSavings BondsTaxesMoney owed to meOther BillsTotal Cash EquivalentsTotal Current BillsPersonal PropertyOutstanding DebtEstimate Equity in HomeHome Mortgage balanceOther Real EstateOther MortgagesHousehold FurnishingsAutomobile Loan balanceSpecific Items of ValueStudent Loan BalanceAutomobilesOther Personal PropertyTotal Real & Personal PropertyAll Other Loan BalancesTotal Outstanding DebtTotal of All LiabilitiesInvested AssetsStocks & Mutual FundsBondsGovernment SecuritiesTotal AssetsIRAsTotal LiabilitiesPensionsNet Worth401(k)s and similar plansTotal Invested AssetsTotal of All Assets
Step #2:Develop Your Financial GoalsOnce you have evaluated your current financial situation, you are ready to move forward in the financialplanning process. The second step is developing your financial goals. Setting goals will give you adirection for your plan and a destination toward which you want to head.When creating financial goals, you will want to consider obvious objectives such as monthly savings orretirement investments. However, also consider other goals you have which may not immediately stickout as financial ones. The goal of backpacking through Europe upon graduation may not seem like afinancial goal on its face. But, when considering the cost of a three week European vacation, you maywant to think about adding this goal to your personal financial plan. Do you think you may need a newcomputer within the next couple of years? Maybe add purchasing a new computer in two years to yourlist of goals. Anticipating future expenditures you would like to make and incorporating them into yourfinancial plan can help you put yourself in a position to afford them as they arise without having to makesacrifices elsewhere in your budget.As you develop your financial goals, recall the first tip from Chapter One which discussed setting yourgoals. Your goals should be SMART, that is specific, measurable, attainable, realistic, and time-based.You should also develop short-term, intermediate, and long-term goals. Developing each of these typesof goals will allow you to achieve successes early in the plan while also keeping your eye toward thefuture. Short-term or intermediate goals may also serve as stepping stones to reach long-term goals.For instance, a short term goal of saving 200 a month may help you accumulate funds for the downpayment on a home. An intermediate goal of paying off student loan debt a year ahead of schedule mayhelp you free-up monthly income that could instead be used to make a car payment.When developing your goals, be sure to differentiate between necessities and wants. Establishpriorities. Consider the net worth you calculated in step one and how realistically your goals align withyour current financial situation.Considering the points in this section, reexamine the financial goals you set in Chapter One. Using theworksheet on the following page, add to, amend or re-record those goals for incorporation into yourpersonal financial plan. Be sure to prioritize your financial goals in order of their importance to assistyou later in the planning process.Once you have set your goals, refer to your target date and the duration of your goals’ costs todetermine a monthly cost that will be associated with working toward your goal.
Financial Plan Goals WorksheetShort-Term Goals (Less than 1 year)PriorityGoalTotal CostDurationMonthly CostTarget DateIntermediate Goals (1-10 years)PriorityGoalTotal CostDurationMonthly CostTarget DateLong-Term Goals (Over 10 years)PriorityGoalTotal CostDurationMonthly CostTarget Date
Step #3:Identify Alternative Courses of ActionSo far in the planning process you have evaluated your current financial situation and established someSMART short-term, intermediate, and long-term goals. But your goals won’t be accomplished simply bycreating them. You will have to devise strategies to help you bridge the gap from where you are todayto where you would like to be. Just as there is more than one way to get from campus to your favoriteice cream shop in town, there is more than one route you can take to achieve financial success as youhave defined it. The next step of the financial planning process involves identifying alternative coursesof action that can lead you to your goals.Let’s suppose you’re planning to study abroad next year. You’d like to be able to make the most of yourexperience while overseas and have enough financial resources to travel while abroad. You havedecided you would like to have saved 4,000 by the time you depart in 15 months, specifically for yourtravel endeavors. Maybe your financial situation is such that, so long as it persists in its current form,you will be financially prepared for your travel adventures while abroad. But if you are like most collegestudents, that is not likely.So what are your options for changing your current situation to make this goal a reality? We’ll say youcurrently have an extra 1,000 in savings from your last summer job that you are willing to shift intoyour semester abroad travel fund. This leaves you with 3,000 to generate over the next 15 months, or 200 dollars a month you will need to deposit into your travel fund to reach your goal. Thinking back tothe budgeting and saving exercises from the previous chapter, perhaps you could decrease allocationsto various expenses and shift more of your monthly income to savings for your travel fund.Recall the budget you created in chapter one. Maybe by limiting unnecessary travel and carpoolingwhenever possible, you could decrease your transportation expenditures by 75 per month. Perhaps bymaking more meals at home and limiting your new clothes purchases, you could cut your food anddiscretionary allowance allocations by 50 each. Going to discount movie theaters could help youdecrease your expenditures on entertainment by 25 per month. By implementing good savings habits,you may be able to free-up enough of your current income to deposit in your travel savings so that in 15months you will have reached your goal.But maybe you have already applied the principles of the saving activity from chapter one to yourcurrent budget and there is little for you to cut. Adding a new job or hours to an existing job may helpyou increase your monthly expendable income so you can contribute the needed amount to your travelsavings. At a minimum wage of 7.25 per hour, about 7 hours per week would help you earn yourmonthly 200 contribution you need to be making to your study abroad travel fund.Generally, your alternative courses of actions will fall into one of two categories: reallocating existingresources, or generating new ones. Existing resources can be utilized by earmarking current savings orshifting current allocations as in the example above. Generating new resources may require changingjobs to improve your wage outlook, taking on additional hours or investing your savings moreaggressively to generate higher rates of return.
Goal Strategies WorksheetSelect one of your short-term, intermediate, and long-term goals you established earlier. Consider thetarget date for accomplishing the goal and the monthly cost associated with the objective. Brainstormthree different strategies for reaching each goal, making use of a strategy from both categoriesdiscussed above.Short-term Goal:Target Date:Monthly Cost:Strategy 1:Strategy 2:Strategy 3:Intermediate Goal:Target Date:Monthly Cost:Strategy 1:Strategy 2:Strategy 3:Long-term Goal:Target Date:Strategy 1:Strategy 2:Strategy 3:Monthly Cost:
Step #4:Evaluate Your AlternativesOnce you have given serious thought to the options available that could lead you to your goals, you maybegin to realize just how many options there are. So, which courses of action should you take to achieveyour desired goals? The answer is: that depends. While the Declaration of Independence tells us allmen are created equal, the same may not be said for the various financial strategies available to aid youin accomplishing your dreams. Therefore, before you can select strategies to complete your financialplan, you’ll have to thoroughly evaluate and weigh your options.When assessing your options consider the pros and cons of each option. An option you are consideringto increase your income may be moving income you are saving from a savings account to a stockportfolio. The change in investment methods may increase your rate of return received on your savings,helping you generate new revenue without having to work more hours. However, the stocks yoursavings are now invested in may also carry substantially more risk than did the savings account in whichyou previously deposited your savings. When evaluating your alternatives, also be sure to consider theopportunity costs of what you will forego to pursue your goal through each course of action.Adequately evaluating each of your options can help to ensure you select the best course of action toaccomplish your financial goals. Using the chart below, consider one of your goals from above andweigh two strategies you identified that could lead you to success.Goal:Strategy 1:ProsConsProsConsStrategy 2:
Step #5:Create and Implement Your Financial PlanAt this point, you have done the bulk of the work associated with creating a personal financial plan. Sofar you’ve looked at your current situation, set goals, identified alternative courses of action, andevaluated your options. Now it’s time to put all of the pieces together to create and implement yourfinancial plan.As you put together your financial plan, it’s important to look at the entire picture. Having identifiedoptions for reaching your goals and having weighed each strategy, it’s now easier to look at the cost ofyour goals in terms of your current situation. This can help you to prioritize your goals as you considerhow much it will cost you to implement each one.Finalizing your plan will require you to make decisions as to which goals to