How To Create Your Financial Plan

by Tax Guy - Burlington Accountant on May 21, 2010 Print This Post Print This Post

We all have desires and goals we want to achieve. Saving for retirement, children’s education or buying a home is attainable by most of us. However, at the end of the month you may wonder where your money went and how you will ever reach your goals.

Regardless of your stage in life, income, or wealth, a financial plan helps you clarify and prioritize your goals and set objectives for reaching your goals.

These six simple steps will point you in the right direction.

Step 1 – Track Your Net Worth
Step 2 – Track and Manage Cash Flows
Step 3 – Establish Your Goals
Step 4 – Establish a Savings and Investment Plan
Step 5 – Cover Your Risks
Step 6 – Review Your Plan Annually

Step 1 – Track Your Net Worth

The net worth statement provides a picture of your financial position at a point in time. A net worth statement help you track your financial progress and can be used to establish a strategy to improve your goals and feel secure.

Your net worth is the total of what you own less what you owe. Your net worth statement helps you determine what your assets are and quickly you can access cash. A review of your liabilities will show how debt affects your worth and whether you have sufficient insurance coverage. The statement helps you identify problem areas and take steps to correct those problems.

Your net worth should be re-calculated annually and compared to the prior year if it is to provide any value.

Your net worth should increase annually. If your net worth is negative, then you must take steps to reduce debt, increase assets, increase investment income or revise your goals accordingly.

Step 2 -Track and Manage Cash Flows

Your net worth statement looks at a single period in time while your cash flow statement measures a period of time. The only way net worth can grow is if cash flows are positive or you have savings. If cash outflows exceed inflows, then action must be taken to correct the situation either be increasing income or reducing expenses.

Tips to improve cash flow:

  1. Reduce expenses: Eliminate discretionary items to ensure there is a workable long-term plan. A budget worksheet or budget software can help you understand your expenses.
  2. Restructure debt: Take a term loan, line of credit, or refinance your home and close un-needed high interest consumer credit card accounts.
  3. Defer purchases of non-income producing assets: Defer the acquisition of non-income or negative cash flow asset acquisitions. Reduce, restructure, defer. This is the key is to reduce cash outflow and improve cash inflow.

The cash flow statement is used as a planning tool to look for opportunities to improve net worth.

Step 3 – Establish your Goals

The overall objective is to establish what you want and how you are going to get there.

What are your goals?

  • Buy a home
  • Take an exotic cruise
  • Save for your retirement or you child’s education
  • Buy a vacation home
  • Purchase a pool
  • Buy an exotic car

Sit down with your partner and commit to paper a list of what you want to achieve. Categorize short-term and long-term goals and rank them in order of priority. You may need to make revisions allowing more time for some things and less time for others. Look at your cash flow statement and flexible expenses to determine if expenses can be reduced or eliminated. Look at your investment and determine if repositioning assets can enhance investment income.

Step 4 – Establish a savings and investment plan

From your cash flow statement you will and goals you will see how much you will need to achieve your goals. It may be necessary to revise your budget and make adjustments to increase income or reduce expenses.

Any savings and investment plan should have the following elements:

  • The goals must be realistic and attainable.
  • Pay yourself first. Set up an automatic rep-authorized plan to divert funds into your savings.
  • Avoid the use of consumer debt and avoid spending more than you make.

The reward for a disciplined and methodical approach to the plan is the attainment of your goal!

Step 5 – Cover your risks

Events occur in life that are uncontrollable are those things that can affect us financially. These include loss of employment, accidents, property damage, health and illness, or death. To effectively manage these risks:

Establish an emergency fund of approximately three months of income. A line of credit can be used rather than short-term investments that have lower rates of return. If unused, the line of credit costs nothing and your savings can remain invested in higher yielding investments.

Any risks that cannot be covered personally must be covered by passing the risk on to a third party such as an insurance company. The level of insurance needed depends on your financial situation.

Insurance needs analysis varies based on the type of risk and policies available.

Step 6 – Review Your Plan Annually

Situations change and you should review and update your plan annually to see how far you have come. Did your net worth meet it target? Were you able to meet all of your goals? What circumstances are different?

Review, update and revise your net worth statement, cash flow statement, goals, and risks annually. Make revisions as required.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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