Financial plans are crucial in order to assess whether or not you will be able to reach your financial goals, and therefore assist in determining the steps you should implement in order to accomplish them. Personal finance management outlines how an individual, in the broadest sense, manages money. This includes how he or she earns, spends, saves, and invests money, but also includes the handling of financial products (loans, credit cards, insurance, private pensions, investments, and more).
The goal of any personal finance management strategy is to ensure that revenues (salary – salary, fees, and other income) are higher than expenditures (expenses). That surplus, otherwise known as “balance”, is the reward that we can use to achieve some of our personal or business desires and goals.
Tracking of Income and Expenses
You need to keep detailed records of what you earn and spend, and this information will help you know how much you spend and what your true income is. If you have a company, it is best to keep two separate records; one for yourself and one for the company, no matter how much your income and expenses are intertwined.
You can keep records in an excel spreadsheet, in mobile applications, special applications (primarily for companies), or manually.
No special prior knowledge is required to record detailed records of your transactions, and it is best to start managing your transactions today.
When you decide to manage income and expenses, the most important thing is to organize your categories of income and expenses in as much detail as possible, because that is where you will find the category where your money “runs away” the most. It can also be of great assistance come tax time.
Example of personal income: earnings, gifts, assistance, real estate income, interest, etc.
Example of business income: income from sales of products, provision of services, consultations, income from sponsorships, donations, etc.
Examples of personal expenses: renting an apartment, overhead costs, food, going out to eat at restaurants, fuel, personal care, household supplies, buying clothing and shoes, loan installments, etc.
Examples of operating expenses are: rent, overheads, employee salaries, production, distribution, marketing, bookkeeping, etc.
Examples of periodic expenses: equipment procurement, research & development, etc.
Setting Goals
Setting goals and creating a financial plan are connected, we make financial plans in order to achieve certain goals.
Before creating a financial plan, it’s important to set goals that you want to achieve, because those goals are the driving force behind why you manage finances, saving, and investing.
Goals should be based on your interests and values and should be defined, measurable and achievable. These goals are the motivations to maintain your financial plan.
Examples of personal goals are: buying a new phone, gold reserve, summer vacation, taking a year off work, travel, buying a car, renting a nicer apartment, or buying a house.
How to Create a Financial Plan
With a financial plan or budget, you determine what you will spend your money on, and in what amount, within a certain month or other period of time, in order to achieve a monthly balance-surplus that helps you reach your goals. I am a supporter of the monthly budget model, which includes a balance of wants and needs.
Based on income and expenses from previous periods, you make a financial plan to determine the category and then allocate how much you will spend within that category. Then, determine what percentage of income you will contribute to each category. You can use these metrics for reducing percentages allocated in the future when needed.
After setting up your financial plan (budget), it is very important to continue to manage revenues and expenditures with as much detail as possible. Be sure to check at the end of the month to determine whether or not you are within the planned framework. Make adjustments if necessary, based on what is realistic.
If necessary, change your financial plan.
Financial planning should start early. If you begin saving when you are young, your money will have more time to grow. The purpose of a financial plan is to help you determine the time frame of your goals, and to help you understand the steps that you will need to take in order to reach them. Gaining a good understanding of what financial planning is can help you get started working toward a more successful financial future.
Knowing how to write a financial plan can help make the difference in your financial success. If you complete a plan, you will be less likely to make poor financial decisions. Financial planning can also help you enter a higher income bracket and improve your quality of life.
So what is in a financial plan? A financial plan should be comprehensive and include a number of elements like:
- Financial goals
- Statement of your net worth
- Analysis of your cash flow
- Strategy for retirement
- Risk management plan
- Tax planning
- Investment plan
- Estate plan
Creating a financial plan will take a bit of work, but the end results can be life-changing. Writing up your own plan can put you on the path to greater financial health and a better future. It’s important for you to understand that your personal financial plan and its components should not be static. After you have learned the purpose of financial plans and have completed your income, liabilities, and asset evaluation, you should review the document regularly to check your progress towards reaching your goals.
Why Make a Financial Plan?
Once you have a general idea of what the plan is, you will need to see how to set up a financial plan. You will have to keep track of your assets, your income, how you spend your money, the debts that you have, and your taxes. The first step is to track where you are spending your money in order to have a clear idea of your current finances.
Track Where You Are Spending Your Money
You should begin by tracking all of your expenditures for 1-2 months. Categorize your spending according to the purchase type or the store so that you can understand areas in which you might be able to cut back.
There are several methods to track your spending, including the following:
- Track your purchases by the store
- Use an app to track spending while you are on the go
- Track as you go with an expense spreadsheet
- Use separate accounts for spending and bills
- Download your transactions from your bank and credit cards into a spreadsheet
Tracking your spending for a month or two can help you to understand the picture of your personal finances to set your financial goals.
Organize your financial records
You should gather all of your documents into one place and organize them. Some of the documents that you should gather include the following:
- Bills
- Bank statements
- Pay stubs
- Contracts
- Credit cards
- Investments
- Retirement account statements
- Auto records
- Mortgage statements
- Tax returns
- Insurance records
- Medical bills
Complete an Evaluation of Your Assets to Determine Your Net Worth
To do this, you will need to determine the market value of each of your assets. This is the price you’d be able to sell the asset for if you found a willing buyer.
Begin by taking an inventory of all of your assets and write them down. You can then look up the fair market value of all of your fixed assets. Determining the value of your intangible assets may require some more work. After you have valued all of your assets, you will then need to take an inventory of all of your income sources, as well as your liabilities.
Write down all of the sources of income that you have so that you can see a monthly total. If your monthly amounts vary, use an average value of your earnings for the last six months. Finally, list all of your debts and total them.
Set Your Financial Goals for the Future
Setting your financial goals is the next step in writing a financial plan. Decide how much you want to have available for your retirement. Think about other goals such as your children’s college savings, purchasing a home, retiring early, and other things that you would like to accomplish. Decide how much money it will require to meet each of these goals.
A financial plan example of possible goals might include the following:
- Pay off your credit card debts
- Create a budget that you can live comfortably on
- Save an emergency fund of three to six months’ worth of your income
- Spend less than you earn
- Save for your retirement
- Save a down payment
- Save for college
- Pay off your student loans
- Increase your income
Once you have an idea of your goals and how much money you will need to set aside to accomplish them, your next step of financial planning will be to identify the steps that you will need to meet each goal and to write your financial plan. Your budget is the first step toward planning for the future. Once living within your budget becomes a habit, you will find a lot more money in your savings and financial planning accounts.
Don’t be hard on yourself when you fail here and there; it’s ok, at least you will know where you drop the ball when you do. Mistakes can help you learn to keep your afternoon walk away from retail stores or remind you to avoid the coffee shop that’s next to the electronics store. Figure out your weaknesses, and remember it’s just as important to reward yourself for good work, whatever that might be. Have fun with it and remember, your choices are benefiting your future, not just today.
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