From Deborah Fowles, former About.com Guide
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Personal Financial Plan Step One - Assess Where You Are Now Financially
- Prepare a Net Worth Statement. See Net Worth Statement.
- Calculate Your Debt-to-Income Ratio See Debt-to-Income Ratio
- Prepare a Cash Flow Analysis
- A Cash Flow Analysis, aka "budget" or "spending plan", lists your income and expenses by month. Subtract your expenses from your income to obtain your net cash flow. If it's positive, plan what to do with the excess. If it's negative or you break even, either find ways to increase your income or cut your expenses (or both, for even better results). See Budgeting Guidelines and Motivation.
- Manage Your Risk. Are you, and your business if you have one, adequately protected in the following ways?
- Business insurance
- Homeowners insurance
- Health insurance
- Long-term disability insurance
- Do you have the lowest possible interest rates on your debts?
- Mortgage
- Credit cards
- Car loans
- Assess Your Risk Tolerance
- How much risk are you comfortable with? There are lots of online tools that will help you determine your risk tolerance.
If you have investments, prepare an asset allocation analysis (how much in stocks, how much in bonds, etc.) Are you comfortable with having these amounts invested in these types of investments? Do you have all (or too many) of your eggs in one basket?
Personal Financial Plan Step Two - Determine Where You Want To Be Financially
- Set specific, measurable one-year, three-year, and five-year goals as well as longer-term goals. See Setting Financial Goals
- Establish an emergency fund
- Pay off credit card debt. See Get Out of Debt.
- Contribute to your employer's retirement plan if there is one. If not, set up a retirement plan (such as an IRA) and contribute to it regularly.
- Pay off the mortgage. See 15-Yr Mortgages.
- Achieve financial independence by a certain age
- Be sure your investments are diversified
- Minimize your taxable income
- Other personal financial goals
- Establish children's college funds
Personal Financial Plan Step 3 - Design a Plan To Reach Your Goals
- Build a liquid emergency fund
- Pay off credit card debt
- Pay off other debt
- Draw up a will
- Set up a retirement plan
- 401(k)
- Keogh profit sharing (mandatory contributions) or money purchase plan
- Roth IRA
- Traditional IRA
- Other (SEP, etc.)
- Start investing or continue to invest according to your risk tolerance
- Set up an education fund for your children (529 Savings Plan) and contribute to it monthly
- Set up a budget (regardless of your income) and find ways to reduce unnecessary expenses or increase your employment income if you have a shortfall or you don't have enough left over to invest.
Personal Financial Plan Step Four - Implement the Plan
- Start tracking your income and expenses using a budget form, spreadsheet software like Excel, or a computer program like MS Money.
- Research investments that fit your risk tolerance and begin investing on a regular basis. You can do this online or through a broker. You'll pay more using a broker but there are several low-cost online brokers with good reputations that you could use instead of a full-service broker.
Personal Financial Plan Step Five - Monitor the Plan
- Use your budget to track your progress on your goals monthly or at least quarterly.
- Update your Net Worth Statement at least quarterly, but preferably monthly.
- Make adjustments in spending as necessary if you are deviating from your plan.
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