| Basic Financial Planning

Basic Financial Planning


If you know absolutely nothing about personal financial planning, you’ve come to the right place. In this article, we will discuss basic financial planning. Once you understand each basic step, you will be able to start planning your own financial goals and straighten out your finances.

Calculate your Net Worth

The very first thing you should do when looking to plan your finances is to figure out your net worth. Your net worth is equal to all of your assets. Add together the value of all your investments (stocks, bonds, mutual funds, etc.), cars, value of your house, cash and savings, and any other high value items.

Next, add up all of your liabilities which include any money you owe from loans such as car loans, and your mortgage. Subtract your liabilities from your assets and you will get your net worth. If you get a negative number, that is not good. Your goal should be to increase your net worth and ideally have no liabilities, which is basically debt.

Develop your Monthly Cash Flow Budget Statement

Before you start setting money aside, you need to have money to save. A budget will help you to manage your money so you can afford the things you need and want. Similar to calculating your net worth, you will need to calculate your cash inflows and outflows.

First, calculate your cash inflows by including all the money you make including your salary, overtime, part-time job earnings, investment income, and any other money you get. Next, calculate your cash outflows by adding all of your expenses together. Subtract the outflows from the inflows and you have your savings.

If you have a negative number, this means you are going into debt. You MUST look at your expenses and examine them to figure out which you can cut out or cut down. If you break even, you also need to cut back on your expenses, and most likely you will still need to cut back even if you have some excess, depending on how much.

Develop a budget of what you can spend your money on every month and stick to it. It will do you no good if you spend beyond what you’re allowed.

Set your Savings and Debt Elimination Goals

If you have any kind of debt, whether it is credit card debt, car payments, or a mortgage, you need to pay it off. If you have a mortgage, it is okay to pay it off based on your predetermined 15 year or 30 year schedule. A mortgage is okay, but this doesn’t mean you should continually consolidate and take out 2nd and 3rd mortgages. Set goals to get your debt paid off.

It’s likely that you don’t have everything you’ve ever wanted. Some things you just can’t afford at the drop of a hat and you will need to save for them such as a car, house, child’s education, or a vacation. Set goals to save for them.  Open up an ING account to keep your savings organized while earning a high interest rate. The Orange Savings Account. Great rates, no fees, no minimums.

Build an Emergency Fund

Have you ever been stuck with a heavy expense only having to put it on a high interest credit card? This is a bad situation that you don’t want to get stuck in. You need to build an emergency fund to be prepared for large medical expenses, unemployment, or other emergencies. It might seem impossible to do for some people, but in time, you can save enough. Ideally you should save 3 to 6 months of living expenses.

Plan for Retirement

As nice as it would be to have social security be enough to live off of for the rest of our lives, it probably won’t happen. At best you’d be able to just barely survive. It is never too early to start saving for retirement. Talk to your employer about opening up a 401K or IRA account.

Plan your Taxes

You shouldn’t have to pay more to the government than you’re required, but sometimes you do anyway. Study up on tax rules to make sure you are saving the most you can on your taxes.

Start Investing

You don’t have to be Warren Buffet to start investing. Start with just a small amount and put it into a mutual fund. You’ll be glad you did when it starts to grow exponentially.

Protect Yourself with Insurance

Do you have health insurance, car insurance, home owner’s insurance, or life insurance? Your finances could take a bad beating if you do not take care of your assets by getting the appropriate insurance.

Estate Planning

If you died today, do you know where your money would go? As long as you have assets, you should write a will and begin estate planning. Anything can happen, and if the worse happens, you want to make sure you things are taken care of.

Stay Organized!

If you are unorganized, any planning you do could be thrown away. Follow your budget, keep your bills straight, keep track of your spending, and stay organized so that all your work hasn’t gone to waste.

Once you have a grasp of basic financial planning, you will start to feel more stable.  Who knows, you might love it so much you decide to go further with your financial knowledge!

If you would like more information, pick up a copy of Personal Financial Planning.  It gives a great deal of information in more detail on basic financial planning.

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