Creating a Personal Financial Plan, Slides of Finance

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Creating a Personal

Financial Plan

Overview

Setting goals are important and often used to measure success. However, simply setting goals does not ensure you will someday accomplish them. Achieving goals requires establishing a plan. Planning is important to ensure a direction for your day-to-day actions. Being deliberate about establishing a plan can help guide the decisions you make to aid you in reaching your goals. The further your goals are from today, the more important it is to have a plan to ensure your success in reaching those goals. Think about it. You may not consult a map for a trip to the store across town, but you will probably want directions, or a plan, for a spring break trip to California.

When it comes to personal financial goals, many can be long term. Paying off student loans, a new car, or a mortgage on a home does not happen in a month or even a year. Retirement is an even longer- term goal. When it comes to financial matters, planning can be of paramount importance. Creating a personal financial plan has six basic steps:

1. Determine your current financial situation
2. Develop your financial goals
3. Identify alternative courses of action
4. Evaluate alternatives
5. Create and implement your financial action plan
6. Review and revise the financial plan

It is never too early to begin planning. In fact, the earlier you begin planning for your financial future,

the sooner you will reach your goals. Because of the nature of interest and compounding that can be

associated with investing, starting early can have great benefits. The longer your investments have to

grow, the greater their growth will be. For instance, if you invest $5,000 today and receive a 6% annual

compounding interest rate, your investment will grow to approximately $10,000 within 12 years. Within

24 years, the $5,000 investment would grow to $20,000 and within 36 years to $40,000. While a $5,

investment at that rate made at age 48 would only grow to $10,000 by age 60, the same investment

made at age 24 would grow to four times that value by the same age. As you can see, it can certainly be

advantageous to get started planning for your financial future as early as possible.

The worksheets on the following pages will help you navigate the six steps outlined above for creating

your personal financial plan. Remember, your financial goals won’t be realized just by setting them.

You have to be intentional about creating a plan and diligent in executing it. After all, directions to your

spring break destination won’t do much good unless you follow them.

Step #2:

Develop Your Financial Goals

Once you have evaluated your current financial situation, you are ready to move forward in the financial

planning process. The second step is developing your financial goals. Setting goals will give you a

direction for your plan and a destination toward which you want to head.

When creating financial goals, you will want to consider obvious objectives such as monthly savings or

retirement investments. However, also consider other goals you have which may not immediately stick-

out as financial ones. The goal of backpacking through Europe upon graduation may not seem like a

financial goal on its face. But, when considering the cost of a three week European vacation, you may

want to think about adding this goal to your personal financial plan. Do you think you may need a new

computer within the next couple of years? Maybe add purchasing a new computer in two years to your

list of goals. Anticipating future expenditures you would like to make and incorporating them into your

financial plan can help you put yourself in a position to afford them as they arise without having to make

sacrifices elsewhere in your budget.

As you develop your financial goals, recall the first tip from Chapter One which discussed setting your

goals. Your goals should be SMART, that is specific, measurable, attainable, realistic, and time-based.

You should also develop short-term, intermediate, and long-term goals. Developing each of these types

of goals will allow you to achieve successes early in the plan while also keeping your eye toward the

future. Short-term or intermediate goals may also serve as stepping stones to reach long-term goals.

For instance, a short term goal of saving $200 a month may help you accumulate funds for the down

payment on a home. An intermediate goal of paying off student loan debt a year ahead of schedule may

help you free-up monthly income that could instead be used to make a car payment.

When developing your goals, be sure to differentiate between necessities and wants. Establish

priorities. Consider the net worth you calculated in step one and how realistically your goals align with

your current financial situation.

Considering the points in this section, reexamine the financial goals you set in Chapter One. Using the

worksheet on the following page, add to, amend or re-record those goals for incorporation into your

personal financial plan. Be sure to prioritize your financial goals in order of their importance to assist

you later in the planning process.

Once you have set your goals, refer to your target date and the duration of your goals’ costs to

determine a monthly cost that will be associated with working toward your goal.

Financial Plan Goals Worksheet

Short-Term Goals (Less than 1 year)

Priority Goal^ Total Cost^ Duration^ Monthly Cost^ Target Date

Intermediate Goals (1- 10 years)

Priority Goal^ Total Cost^ Duration^ Monthly Cost^ Target Date

Long-Term Goals (Over 10 years)

Priority Goal^ Total Cost^ Duration^ Monthly Cost^ Target Date

Goal Strategies Worksheet

Select one of your short-term, intermediate, and long-term goals you established earlier. Consider the target date for accomplishing the goal and the monthly cost associated with the objective. Brainstorm three different strategies for reaching each goal, making use of a strategy from both categories discussed above.

Short-term Goal:

Target Date: Monthly Cost:

Strategy 1:

Strategy 2:

Strategy 3:

Intermediate Goal:

Target Date: Monthly Cost:

Strategy 1:

Strategy 2:

Strategy 3:

Long-term Goal:

Target Date: Monthly Cost:

Strategy 1:

Strategy 2:

Strategy 3:

Step #4:

Evaluate Your Alternatives

Once you have given serious thought to the options available that could lead you to your goals, you may

begin to realize just how many options there are. So, which courses of action should you take to achieve

your desired goals? The answer is: that depends. While the Declaration of Independence tells us all

men are created equal, the same may not be said for the various financial strategies available to aid you

in accomplishing your dreams. Therefore, before you can select strategies to complete your financial

plan, you’ll have to thoroughly evaluate and weigh your options.

When assessing your options consider the pros and cons of each option. An option you are considering

to increase your income may be moving income you are saving from a savings account to a stock

portfolio. The change in investment methods may increase your rate of return received on your savings,

helping you generate new revenue without having to work more hours. However, the stocks your

savings are now invested in may also carry substantially more risk than did the savings account in which

you previously deposited your savings. When evaluating your alternatives, also be sure to consider the

opportunity costs of what you will forego to pursue your goal through each course of action.

Adequately evaluating each of your options can help to ensure you select the best course of action to

accomplish your financial goals. Using the chart below, consider one of your goals from above and

weigh two strategies you identified that could lead you to success.

Goal:

Strategy 1:

Pros Cons

Strategy 2:

Pros Cons

Step #6:

Review and Revise your Plan

The final step in developing a personal financial plan is perhaps the most important. You may have done your due diligence at each step along the way and created a solid financial plan. However, one fact remains: life happens. For this reason, it is important to review your plan often and revise it as needed.

Reviewing your financial plan can help you to gauge your progress toward meeting your goals. Original strategies may not be having the expected results and may require adjustment to help you meet your goals.

Additionally, no matter how carefully you go through each of the steps to create your financial plan or how perfect the plan may be when conceived, unforeseen events will occur. Your financial situation will change from time to time. You may incur unplanned expenses or receive unplanned incomes. These events may require you to change the path you will follow to reach your goal.

Your goals may also change. While owning a home may not be a priority now, it may be a goal you have later. As current goals wane from your list of priorities and you develop new goals, your plan will have to change to help lead you to your new objectives.

The fact is your life will change. Your financial plan will have to change too. Be faithful in reevaluating your plan from time to time to ensure your goals haven’t changed and that you are on pace to reach those goals.