Financial Planning

The Seven Steps to Success

The Seven Steps For a Financial Plan (steps one and two)

Step One (budgeting and taxes)
Budgeting is the process of forecasting future expenses and income. Budgeting is an important part of your future to guarantee that you are financially set. When you create a budget you should:

  • Establish your net worth
  • Establish your income
  • Identify your expenses
  • Consider the impact of taxes
when establishing your net worth you need to determine where you are financially, and consider the questions, do you have money in the bank? What are your expenses? Do you owe people money? Do you have a job? To find your net worth you need to subtract your assets from your liabilities. To establish your income you have to understand your income, and know that income depends on what type of education and career you choose for yourself. When identifying your expenses you need to have an estimate of how much money you will accumulate over a period of a month to pay for your expenses. When you consider the impact of taxes you have to realize that the higher of an income that you have the higher the share of income taxes you will have to pay.
Step Two (managing your liquidity)
What is liquidity? It's how much cash you have on hand that can be used for immediate needs or wants. Because what if your vehicle broke down, you would need the cash on hand and so that's why you should plan for liquidity. When managing liquidity you have to keep money management and credit management in mind. What are these you ask? Money management is where you make decisions about how much cash or liquid assets to keep in store and how much to invest in liquid assets similar to real estate. If at some point you discover you don't have enough money to cover your sudden needs, then you need more liquidity. With Credit management you make decisions about getting credit and using it. Credit is usually in most cases used to cover immediate cash short falls, so it would increase your liquidity. When using credit the lender will charge you money on the money you borrow. This is called interest. When including credit in your financial plan it should involve details such as limiting the number of credit cards you have and the amount of credit you use at once.

The Seven Steps For a Financial Plan (steps three, four, five, six, and seven)

Step Three (a plan for your financing)

For long term plans you will probably have to borrow money, there are many factors that detemine how much you can borrow and the payment terms. payment terms include specific information about the interest rate the lender will charge you and the time period for paying back the loan. Some lenders will lend you more money than you should borrow, remember you have to make timely payments when you borrow.

Step Four (a plan for managing your risk)

As you accumulate more assets you will have to have a plan to protect them, such as insurance. Insurance will protect you in unexpected events. There are many types of insurance such as house insurance to life insurance.

Step Five (a plan for your investing)

You need to save for liduidity to meet day to day expenses. Any other funds that you don't spend should be invested. Common types of investments are stocks, bonds, mutual funds, and real estate. Keep in mind that different investments can have different risk levels.

Step Six (a plan for your retirement)

People who retire early are people who have included retirement in their financial plan. The government provides several ways to retire easily.

Step Seven (a plan for communicating and keeping records)

Communicating your financial plan to your family is important so you don't go through the financial dispute, keeping records can be good as well. You will need records when you file your taxes and caculate your networth, they are also good to have to use as motivation.