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Make a Financial Plan

Figuring Out Your Finances

Sit down and take an honest look at your entire financial situation. You can never take a journey without knowing where you’re starting from, and a journey to financial security is no different.

You’ll need to figure out on paper your current situation— what you own and what you owe. You’ll be creating a “net worth statement.” On one side of the page, list what you own. These are your “assets.” And on the other side list what you owe other people, your “liabilities” or debts.

Your Net Worth Statement

AssetsCurrent ValueLiabilitiesAmount
Cash__________Mortgage balance__________
Checking account__________Credit cards__________
Savings__________Bank loans__________
Cash value of life insurance__________Car loans__________
Retirement accounts__________Personal loans__________
Real estate__________Real estate__________
Home____________________
Other investments____________________
Personal property____________________
Total__________Total__________

Subtract your liabilities from your assets. If your assets are larger than your liabilities, you have a “positive” net worth. If your liabilities are greater than your assets, you have a “negative” net worth. You’ll want to update your “net worth statement” every year to keep track of how you are doing. Don’t be discouraged if you have a negative net worth. If you follow a plan to get into a positive position, you’re doing the right thing.

[Download the Institute for Financial Literacy’s Net Worth Statement at http://www.financiallit.org/resources/pdf/F22.1.5_NetWorthWorksheet.pdf or http://www.financiallit.org/resources/excel/G2B_Excel/Interactive_Net_Worth_analysis.xls.]

Create a Budget

  • Write down your monthly take-home pay. Or if you’re out of work, your unemployment compensation. If you’re in sales – or work on commission – you may have to estimate, since your income may vary from month to month. List income you receive from any source, like a part-time job, a tax refund, gifts, unemployment, public assistance, dividends, and alimony or child support. Add the entries to determine your actual income for that month. Keep in mind, some of these amounts may fluctuate.
  • List how much you deposit in savings each month from your take-home income, even if it’s only a small amount.
  • List your fixed monthly expenses – the predictable, set amounts for the must-have items and services that you pay for each month – like rent or mortgage, car payment, and telephone, cable, or Internet access.
  • List your variable expenses – the amounts that change, as well as the expenses you pay weekly, monthly, quarterly, semi-annually, or every year – like groceries, clothing, haircuts, property taxes, auto and homeowners insurance, and gas and electric.
  • List estimates for once-in-a-while expenses – like birthday and wedding gifts, or holiday gifts and entertainment. Divide the total of these expenses by 12 to get a monthly estimate.
  • If after paying your bills and putting money in savings, you still have funds, you can carry over the balance for the next month or use it for unexpected expenses. If this month’s balance is negative, look for ways to cut back on the variable expenses.

Know Your Income and Expenses

The next step is to keep track of your income and your expenses for every month. Write down what you and others in your family earn, and then your monthly expenses. Include a category for savings and investing. What are you paying yourself every month? Many people get into the habit of saving and investing by following this advice: always pay yourself or your family first. Many people find it easier to pay themselves first if they allow their bank to automatically remove money from their paycheck and deposit it into a savings or investment account. Likely even better, for tax purposes, is to participate in an employer sponsored retirement plan such as a 401(k), 403(b), or 457(b). These plans will typically not only automatically deduct money from your paycheck, but will immediately reduce the taxes you are paying. Additionally, in many plans the employer matches some or all of your contribution. When your employer does that, it’s offering “free money.” Any time you have automatic deductions made from your paycheck or bank account, you’ll increase the chances of being able to stick to your plan and to realize your goals.

“But I Spend Everything I Make.”

If you are spending all your income, and never have money to save or invest, you’ll need to look for ways to cut back on your expenses. When you watch where you spend your money, you will be surprised how small everyday expenses that you can do without add up over a year.

[Download the Institute for Financial Literacy’s Monthly Budget Worksheet at http://www.financiallit.org/resources/pdf/F22.1.1_BudgetWorksheet.pdf or http://www.financiallit.org/resources/excel/G2B_Excel/Interactive_Monthly_budget.xls]

Track Your Expenses

  • Daily write down all your purchases and enter the amounts into your budget weekly. Save receipts for review. After a month total all expenses to see how you are spending your money.
  • Identify which expense need to be reduced and/or eliminated.

[Download the Institute for Financial Literacy’s Daily Spending Log at http://www.financiallit.org/resources/excel/G2B_Excel/Interactive_Budget_Tracking_Form.xls]

Define Your Goals

To end up where you want to be, you’ll need a roadmap, a financial plan. To get started on your plan, you’ll need to ask yourself what are the things you want to save and invest for. Here are some possibilities:

  • A home
  • A car
  • An education
  • A comfortable retirement
  • Your children
  • Medical or other emergencies
  • Periods of unemployment
  • Caring for parents

Make your own list and then think about which goals are the most important to you. List your most important goals first.

What do you want to save or invest for?By when?
1. ___________________________________________
2. ___________________________________________
3. ___________________________________________
4. ___________________________________________
5. ___________________________________________

Decide how many years you have to meet each specific goal, because when you save or invest you’ll need to find a savings or investment option that fits your time frame for meeting each goal.

Many tools exist to help you decide how much you’ll need to save for various needs. For example, the Ballpark Estimate, a single-page worksheet created by the American Savings Education Council, can help you calculate what you’ll need to save each year for retirement. The Financial Industry Regulatory Authority (FINRA) has a college savings calculator, and the Social Security Administration has a benefits calculator to estimate your potential benefit amounts.

To save more, you’ll need to figure out your current finances and where you can achieve real savings.

[Download the Institute for Financial Literacy’s Financial Goals List at http://www.financiallit.org/resources/pdf/F22.1.4_FinancialGoalList.pdf or http://www.financiallit.org/resources/excel/G2B_Excel/Interactive_Fin_Goal_List.xls

Revise Your  Budget

  • Enter new budgeted amounts
  • Monitor your progress in adhering to your budget

Financial Goals Action Plan

  • Review your goals list and identify the specific steps needed to make your goals a reality.  Include the cost, current resources and how close you are to meeting each goal.

[Download the Institute for Financial Literacy’s Financial Goals Action Plan at http://www.financiallit.org/resources/pdf/F22.1.3_FinancialGoalActionPlan.pdf or http://www.financiallit.org/resources/excel/G2B_Excel/Interactive_Fin_Goal_Act_Plan.xls]

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