Over the next eight columns, I will be showing you how to create your own financial plan. These columns will be linear in format, so starting with this one, we will go through a step-by-step processes to build your personal financial plan. The end-result will be a personal financial plan that can guide you to personal financial independence.
Accomplishing financial goals is much like taking a trip. While some people enjoy jumping in their car and heading off in whatever direction they feel like going, applying such a free-spirited attitude to your money will only lead to disaster.
To reach a specific financial destination you will need a map, but not the kind sold in gas stations. You will have to create your own.
You can begin by filling in the chart below. This will help you determine where you are right now.
When taking a road trip it is usually sufficient to identify your starting point as the city where you live. However, when taking a financial trip it is important to narrow down your starting point even further.
You see, there are probably items included in your net worth you would not want to liquidate in order to meet your financial goals. For example, you may not want to sell your home to help your children pay for college. Therefore, before you begin your financial journey, make a list of only those assets you want to use to achieve your financial goals. I suggest you leaving off items like your home, cars, jewelry, clothing, etc. Below is a list of items I recommend being included in what I call your Hard Worth calculation.
Budgeting: A pre-journey tune-up
Before beginning any journey, it is important to look under the hood to make sure your vehicle’s engine is running smoothly. Applied to a financial journey, this means looking at your cash flow. And yes, this is leads to the dreaded word “budget.” But wait … keep reading.
A budget is not such an awful thing. In fact, if you give it a chance, having a smooth-running budget can be just as reassuring as a smooth-running car. It will enable you to live without fear of a financial breakdown.
Admittedly, this will require a bit of hard work. However, when you are zipping along toward the financial destination of your choice, you will be glad you did this work.
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Budgeting: In the driver’s seat
Creating a budget is not as difficult as you may think. In addition, once established, it will take you just a few minutes each night to keep your budget current. This is one of the most important steps you can take to help ensure your Financial Success.
There are dozens of free budget templates available on the Internet. Just Google “budget template,” and find one you feel would be easiest for you to use. Make sure it has categories that most closely align with where you spend your money and additionally has a space to input your “target expenses” for each category.
Then at the end of each day, write down what you spent according to the categories listed in your budget template, and at the end of the month total up the columns. Once you know how much you are spending on food, entertainment, etc., you can decide how much you want to spend in each category.
Plug your target expenditures for each of the subsequent months’ daily records. Then continue to fill-in your expenditures each day and you will be able to see how you are doing.
With periodic expenses, like a semi-annual insurance payment, break each one down to monthly cost and plug that amount into savings each month. Then when the bill arrives, you will have the money to pay it in the bank.
Maintaining a budget will put you in control of your finances instead of letting your finances control you.
How you compare
Most people like to know how their situation compares with others. The Bureau of Labor Statistics publishes a Consumer Expenditures Report each year showing the average expenditures of the average family. You can review 2016’s report at https://www.bls.gov/news.release/pdf/cesan.pdf. Remember, what this report shows are the average expenditures; these are not meant to be absolutes as each person’s situation depends on his or her income and other goals.
In next week’s column, we will discuss maximizing you most important asset.