How to write a personal financial plan
Hi, Habr! I present to you the translation of two materials: Creating a Personal
Financial Plan and How to Write a Personal Financial Plan .
A financial plan is a paper-based structured strategy for achieving financial health and meeting financial goals. Creating your personal financial plan will not only control the financial situation, but also improve the quality of life by removing uncertainties in everything related to money issues and future needs. Although you can hire a professional financial consultant, self-drafting is quite a feasible task. Most financial planners advise you to follow the next 6 steps .
1. Make a list of your assets and liabilities. Assets are what you own and what is valuable. Commitment - Estimate Your Debt.
2. Count your net wealth. Add the value of all assets, subtract all liabilities from them. Your current net wealth or current net assets are the starting point for your personal financial plan (LFP).
3. Organize the recording of financial data. Create an accounting system for tax deductions, bank statements, insurance contracts, receipts, wills, bills, investment planning decisions, retirement plan decisions, salary certificates, employment contracts, mortgages and other documents related to your financial life.
4. Track your income, expenses or cash flow. This will allow you to more carefully study where you spend money - that is, the habits that led you to your current net well-being.
1. Set short, medium and long term goals. Personal financial planning revolves around goals. Decide for yourself what your lifestyle should be at the present moment, in the future and in the distant future. Then create a goal plan that is comprehensive enough to cover all aspects of your life:
2. Use the SMART approach when setting goals. Make sure your financial goals are: Specific, Measurable, Attainable, Realistic / Relevant, and Time-based. Thus, the goals go from the category of “dreams” to the plane of actual implementation.
3. Think about your financial values. How do you feel about money and why? Why is money so important to you? Answers to these questions will allow you to more accurately understand financial values. For example, it may turn out that money is needed because need time and resources for international travel. Knowing yourself will allow you to better define your financial goals and their priority.
4. Chat with your family.If you have a partner or other family members, make a “family” plan out of “your” financial plan. So you make sure you share goals and values with everyone.
5. Consider all the goals, even those that seem not entirely “financial”. For example, traveling light in Europe does not seem to be a financial goal, but resources are still needed for such a trip.
1. Examine options that are available to you in the process of achieving financial goals. In general, these options will be combined into two groups - use existing resources in new ways or generate new sources of income. For each goal, determine whether you should:
2. Remember that the same goal has many ways to achieve. For example, to travel around Europe, you need to replace going to a coffee shop with homemade coffee. It will save about $ 20 per week. Alternatively, you can sit with your neighbors baby once a week.
3. Determine how goals affect each other. In addition to identifying alternative courses of action within your financial goals, you need to understand how these goals interact. For example, you defined travel as the goal of a “lifestyle”. However, after analysis it becomes clear that learning foreign languages will make it cheaper to travel, or even become a translator, or open a business in another country.
1. Choose specific strategies to complete your financial plan. Take into account the life situation, personal values and the current economic situation.
2. Remember that any choice contains opportunity costs. The opportunity cost is what you donate by making a choice. Saving coffee cups for a trip can take away the opportunity to have a good time, chat with a barista or plan the day properly.
3. Examine the decisions made as a scientist. Collect as much research as you can and carefully check the data. If you are considering some kind of investment, you need to pay special attention to the ratio of profitability and risk - how risky is the investment and what reward can you expect in case of success. Are the risks worth the risks?
4. Recognize that uncertainty is always part of the process.Even if you have done a thorough research, circumstances may change. The economy may fall, reducing investment opportunities. The job you are seeking may make you unsatisfied professionally or personally. Do as you think is right and remember that you need to leave the opportunity to change everything in the future.
1. Look at the situation from a wide angle. Now that you have identified goals, alternative paths, and evaluated these alternatives, make a list of strategies. After assessing the current situation, start thinking which goals are the most realistic.
2. Decide what goals to achieve now. Aim for a balance between short-, medium-, and long-term goals so that you can easily plan for several months and several years.
3. Develop a budget that includes the objectives of the Financial Plan. From an analysis of current wealth, you already know your net assets and liabilities. Include all this in the overall plan with your decisions. Take responsibility for these decisions. If you have pledged to spend less on coffee at $ 80 a month, and put the money you received into a savings account, include this item in your budget.
4. Consider hiring a professional financial advisor. Maybe you are able to make financial decisions on your own, but a professional adviser has the advantage of emotional detachment.
1. Treat the Financial Plan as a working document. Personal finance planning is a process. Life is constantly changing and you will need to constantly update the plan as soon as circumstances or goals change.
2. Plan to review financial goals on a regular basis. If life changes very rapidly (for example, you are a student), goals can be reviewed every 6 months. If your life is less stable (for example, an adult bachelor), the plan can be reviewed once a year.
3. Discuss the financial plan with your partner. If you are in a mature relationship, we hope you have gone the way of planning as a couple. When relationships become mature, a discussion about finances should be part of your discussion of values, goals, and plans to achieve these goals.
Financial Plan and How to Write a Personal Financial Plan .
A financial plan is a paper-based structured strategy for achieving financial health and meeting financial goals. Creating your personal financial plan will not only control the financial situation, but also improve the quality of life by removing uncertainties in everything related to money issues and future needs. Although you can hire a professional financial consultant, self-drafting is quite a feasible task. Most financial planners advise you to follow the next 6 steps .
Stage 1: Determine the current financial situation
1. Make a list of your assets and liabilities. Assets are what you own and what is valuable. Commitment - Estimate Your Debt.
- Assets may include cash and cash equivalents (such as deposits in a bank), real estate, cars, land, and invested funds, including stocks, bonds, and various insurances.
- Obligations may include current unpaid bills and debts such as a loan for a car, apartment, treatment, training, etc.
2. Count your net wealth. Add the value of all assets, subtract all liabilities from them. Your current net wealth or current net assets are the starting point for your personal financial plan (LFP).
- Positive net assets mean that you have more assets than liabilities, negative ones mean the opposite.
3. Organize the recording of financial data. Create an accounting system for tax deductions, bank statements, insurance contracts, receipts, wills, bills, investment planning decisions, retirement plan decisions, salary certificates, employment contracts, mortgages and other documents related to your financial life.
4. Track your income, expenses or cash flow. This will allow you to more carefully study where you spend money - that is, the habits that led you to your current net well-being.
Stage 2. Create financial goals
1. Set short, medium and long term goals. Personal financial planning revolves around goals. Decide for yourself what your lifestyle should be at the present moment, in the future and in the distant future. Then create a goal plan that is comprehensive enough to cover all aspects of your life:
- It may turn out that your short-, medium-, and long-term goals depend on each other — for example, saving $ 100 from your personal finances can help fulfill your long-term goal — buying a home.
2. Use the SMART approach when setting goals. Make sure your financial goals are: Specific, Measurable, Attainable, Realistic / Relevant, and Time-based. Thus, the goals go from the category of “dreams” to the plane of actual implementation.
3. Think about your financial values. How do you feel about money and why? Why is money so important to you? Answers to these questions will allow you to more accurately understand financial values. For example, it may turn out that money is needed because need time and resources for international travel. Knowing yourself will allow you to better define your financial goals and their priority.
4. Chat with your family.If you have a partner or other family members, make a “family” plan out of “your” financial plan. So you make sure you share goals and values with everyone.
- It may turn out that priorities will be different. Then discuss everything carefully to come to an agreement and both feel comfortable regarding the financial future.
- Understand that some people may be more focused on finances than others. Determine who will be responsible for the family budget or provide ways to work together so that everyone can get the necessary degree of control over the situation.
5. Consider all the goals, even those that seem not entirely “financial”. For example, traveling light in Europe does not seem to be a financial goal, but resources are still needed for such a trip.
- Development goals may include additional education, leadership development, sending your children to various education.
- Think carefully about how you plan to earn income. Will it be necessary to deepen, change, expand some of the functionality?
- Lifestyle goals cover everything related to fun and entertainment, as well as what will ensure the quality of life to which you aspire.
- Housing related purposes include renting, purchasing, or relocating.
- Imagine a lifestyle after retirement and create a set of personal financial goals that will ensure this standard of living.
Stage 3: Identify Alternatives
1. Examine options that are available to you in the process of achieving financial goals. In general, these options will be combined into two groups - use existing resources in new ways or generate new sources of income. For each goal, determine whether you should:
- Keep moving in a given direction.
- Develop current situation
- Change the current situation
- Choose a radically new course.
2. Remember that the same goal has many ways to achieve. For example, to travel around Europe, you need to replace going to a coffee shop with homemade coffee. It will save about $ 20 per week. Alternatively, you can sit with your neighbors baby once a week.
3. Determine how goals affect each other. In addition to identifying alternative courses of action within your financial goals, you need to understand how these goals interact. For example, you defined travel as the goal of a “lifestyle”. However, after analysis it becomes clear that learning foreign languages will make it cheaper to travel, or even become a translator, or open a business in another country.
Stage 4: Rate Alternatives
1. Choose specific strategies to complete your financial plan. Take into account the life situation, personal values and the current economic situation.
- Think about how close you are to the stated goals and how far these goals will advance you in each of the selected categories. Do you see any flaws in certain areas? Maybe you should take a closer look.
- Be practical. A step-by-step plan will propel you to the stated goal, without making you frustrated or broken during implementation.
2. Remember that any choice contains opportunity costs. The opportunity cost is what you donate by making a choice. Saving coffee cups for a trip can take away the opportunity to have a good time, chat with a barista or plan the day properly.
3. Examine the decisions made as a scientist. Collect as much research as you can and carefully check the data. If you are considering some kind of investment, you need to pay special attention to the ratio of profitability and risk - how risky is the investment and what reward can you expect in case of success. Are the risks worth the risks?
4. Recognize that uncertainty is always part of the process.Even if you have done a thorough research, circumstances may change. The economy may fall, reducing investment opportunities. The job you are seeking may make you unsatisfied professionally or personally. Do as you think is right and remember that you need to leave the opportunity to change everything in the future.
Stage 5: Creation and implementation of the Financial Action Plan
1. Look at the situation from a wide angle. Now that you have identified goals, alternative paths, and evaluated these alternatives, make a list of strategies. After assessing the current situation, start thinking which goals are the most realistic.
- Consider your current net wealth. If liabilities are close or exceed current net assets, you will want to take steps to change this ratio.
- Although you can focus on growing your net worth, don't forget that paying off debts is also a great alternative. Interest payments can lead to the fact that even minor debts can become significant over time. Transferring a portion of resources to debt reduction can prevent serious problems in the future.
2. Decide what goals to achieve now. Aim for a balance between short-, medium-, and long-term goals so that you can easily plan for several months and several years.
- Focus on gradual growth. In this way you will create a roadmap that will lead you to the planned goals.
- Be realistic. Apply immediately all the strategies at once will not work. However, choosing a balanced set of goals can accomplish them, as well as grow to a point where you can take on additional projects.
3. Develop a budget that includes the objectives of the Financial Plan. From an analysis of current wealth, you already know your net assets and liabilities. Include all this in the overall plan with your decisions. Take responsibility for these decisions. If you have pledged to spend less on coffee at $ 80 a month, and put the money you received into a savings account, include this item in your budget.
- Goals such as finding a new job can be left out of the budget, but they should be mentioned somewhere in a place that can be compared as part of your working financial plan.
4. Consider hiring a professional financial advisor. Maybe you are able to make financial decisions on your own, but a professional adviser has the advantage of emotional detachment.
Step 6: Review and adjust your financial plan
1. Treat the Financial Plan as a working document. Personal finance planning is a process. Life is constantly changing and you will need to constantly update the plan as soon as circumstances or goals change.
2. Plan to review financial goals on a regular basis. If life changes very rapidly (for example, you are a student), goals can be reviewed every 6 months. If your life is less stable (for example, an adult bachelor), the plan can be reviewed once a year.
3. Discuss the financial plan with your partner. If you are in a mature relationship, we hope you have gone the way of planning as a couple. When relationships become mature, a discussion about finances should be part of your discussion of values, goals, and plans to achieve these goals.