In today’s changing economic times, establishing a financial plan is very important in building a strong financial future. Defining goals and managing finances to achieve these goals allows people to be prepared to face the challenges of being financially secure.
Financial planning involves several steps. Each one is important and all must be coordinated if your financial plan is to succeed. The following are the four main steps in the process:
- Evaluating the current situation
- Setting goals, and
- Reviewing progress
Evaluating the Current Situation
The first step in developing any financial plan is for you to evaluate your net worth. To begin, it is recommended that you calculate this by drafting a list of assets (home, cars, savings investments etc.) and then a list of liabilities (Mortgages, student loans, credit card debt, etc.) Once these lists are compiled, each category should be totaled and the liabilities would be subtracted from the assets. The dollar amount that is remaining would be your net worth. It is recommended that you calculate your net worth at the beginning of every year to see what progress is being made.
Once the net worth is calculated, the next step would be to formulate a budget. A budget is necessary in order to gain control over one’s finances. It is the only way to get a grip on spending and reviewing your finances to your benefit. There are several steps to creating a budget. They are as follows:
Step 1: Estimated Monthly Income and expenses
- Gather all bills, including credit card statements, receipts for groceries, gas, or anything else that is bought with cash. You should have your checkbook register available to review additional expenses.
- If you have not been keeping records, you may need to keep track of every dollar you spend for a month before a budget can be created.
Step 2: Spending LedgerIt is recommended you keep a (spending ledger) to record all purchases you make.Save all receipts so that you can compare to the spending ledger.Continue to compare your actual spending to the budget. This will help reduce or even eliminate some expenses.Focus on areas that may require adjustments.
Step 3: Review Progress
- Routinely compare actual spending to the budget. This will help to reduce or eliminate some expenses.
- Identify areas that may require adjustments.