It is quite important to do a personal finance planning if you want to have a solid financial footing for you and your family. In order to create a personal financial plan, at first, you need to evaluate your current position and then determine your short and long term monetary goals. Read on to find how to create a financial plan in order to achieve your monetary goals.
3 Steps to create a financial plan
Personal finance planning is not at all a difficult task. Just follow these 3 simple steps to create a personalized monetary plan that will help you to secure a solid financial footing.
1. Assess your current financial position: The basic requirement for creating a financial plan is to determine your present position, that is, to assess your cash flow, net worth, your investments and your debt-to-income ratio.
- Cash flow: Calculate your total monthly income and expenses and check whether or not you’re getting a positive cash flow, that is, whether you can save a substantial amount every month. If not, then look for areas where you can cut down your expenses so that you can plan how to use your savings in order to reach your financial goals.
- Net worth: Net worth is another important tool to assess your overall financial condition. Calculate your liabilities and assets in order to figure out your net worth.
- Calculate investments: Check how much money you have invested already. Ask yourself whether or not you’re satisfied with the amount invested.
- Debt-to-income ratio: Calculate what amount of your income goes towards your debt payments every month.
Apart from above, you also need to determine whether or not you and your business are adequately insured. Check whether or not you have homeowners insurance, health insurance, auto insurance along with adequate business insurance in order to protect your from unforeseen circumstances.
2. Determine your financial goals: The next step in personal financial planning is to determine your financial goals. Make sure you set short as well as long term monetary goals and write them down. You may want to save a substantial amount for a down payment on your home, need funds for a vacation or you want to plan for your retirement. You can also set a goal to build an emergency fund or pay off your debts. However, be specific while determining your goals. As for example, if you want to pay off your debts, determine which debt to repay first.
3. Make a plan to attain your goals: After you’ve set your goals, it is the time to make a plan to achieve them. Check out the following points to know how to create a plan.
- Make a realistic budget: The first step is to create a realistic budget. If you already have one, then revise it in order to make adjustments according to your set target. You may need to reduce expenses and increase savings.
- Allocate your savings: After you have managed to save a certain portion of your income, allocate an amount to each of your financial goals. As for example, if you have 2 goals – to pay off debt and to build an emergency fund, then divide your savings amongst these 2 categories.
In the next step, put your personal finance plan into action. Check whether or not you’re actually able to save the required amount and utilize it to attain your financial goals. It is essential in personal finance budgeting to review your plan bi-annually or annually in order to check how far you have attained your financial target and to make revisions if required.