Here's how to create an effective personal financial plan: know your net worth and cash flow situation, get enough insurance, build an emergency fund and set goals.
Editor’s Note: This post comes from partner site The Digerati Life.
It’s important to formulate a strong and practical financial plan in order to move ahead in life. So how can you develop such a plan?
Developing a strong and sensible plan for your finances is the first step to help you sustain financial stability; having goals will help you pave the way to accomplishing your objectives.
Now the key to devising an effective financial plan is to first assess your present situation completely. Expect your plan to be a dynamic entity, but it’s always a good thing to start with a strong foundation for it, which you can build on over time. You should be able to modify your plan without difficulty as your life situation changes. A good rule of thumb is to evaluate your financial strategy whenever there’s a major change in your life, or at least once every year.
Check your net worth and cash flow!
Here’s how to start: The foundation for any personal financial strategy is your net worth. Know the state of your net worth and cash flow so you have a clear picture of how you stand financially.
To work out your cash flow, figure out your monthly income from all your sources and identify your monthly expenditures. To be in a healthy position, you’ll need to be cash flow positive such that you make more than you spend. If you don’t have a positive cash flow, identify spending areas where you can cut down on your expenditures (common categories are in dining and shopping). Do your best to try to raise your income. Once you establish a positive cash flow, you can begin to accumulate savings to achieve your financial objectives.
Net worth is an essential item that pins down your overall financial situation. To ascertain your net worth, work out your assets and liabilities. Assets might include high yield savings accounts, cash, real estate, investments and personal belongings. Liabilities include all unpaid loan obligations like your car payments, balances on your mortgage as well as credit cards.
Your net worth is then calculated by deducting the liabilities from your assets. You should aim for constant growth in your net worth year after year.
Make sure you’ve got enough insurance.
Most people focus on making money and saving it. But what about protecting what you already have? Thus, you also need to make sure your assets are protected. You’ll need to handle risk. This is where insurance plays a major role. Make sure that you have sufficient insurance coverage to protect your finances from unforeseen events. Get yourself covered with auto, health, life, home and disability insurance.
Build your emergency fund.
Your financial plan must also incorporate an emergency fund since this provides a buffer against unexpected events such as unemployment or a severe illness. Your emergency fund must be liquid so that you can access it instantly; keep your short term savings in high yield checking accounts or money market funds. Financial advisors recommend that you earmark at least six months’ expenditures for your emergency fund. I’d personally go for a bigger fund — at least 9 months’ worth of expenditures are in my personal fund!
Set your goals for the future.
Now that you’ve made a plan for your short-term requirements, include future objectives into your plan. Your longer term goals might include setting a date for your mortgage to be paid off, setting an age when you’d want to happily retire, planning for holiday trips you would want to take or saving an amount for the education of your kids.
If you think you need assistance to design a personal financial plan, then talk to a financial advisor. He or she can suggest strategies to help you grow your net worth and cash flow, and can give you a lot of useful money management tips.