In part 1, we talked about setting goals and objectives, as well as determining your current situation.
Let’s continue on the next steps to planning your personal finances.
Figuring Out Your Net Worth
As you work on your financial plans for today and the future, you’ll want to know where you stand on the basics too. Knowing the true situation with your assets and liabilities is the first step toward knowing where you stand and where you’re going.
Adding Up Your Assets
Your assets include cash, cash equivalencies, certificates of deposits, checking accounts, savings accounts, pension plan, money market accounts, physical cash, treasury bills, property, land, or anything that can be turned into cash.
Adding Up Your Liabilities
Your liabilities include anything you owe to other people, including your mortgage, student loans, credit card debt, auto loans, income tax owed, interest payments, and other personal loans. If you owe it, it’s a liability. If you owe it and it has a contract, it’s a liability.
Your net worth is figured by subtracting your liabilities from your assets. Some people who owe a lot may find out that their net worth is negative, which can be disturbing; but don’t worry, it will improve over time.
Choose Your Budget Method
Now that you have a picture of where you stand and some ideas about where you want to go, it’s helpful to choose a budgeting method that works for you. Here are a couple of examples.
The Zero-Based Budget Plan
Some people like using so-called zero-based budgeting, which means that each month, you set up your spending to zero out each of the budgeted actions you take. People who use zero budgeting like to put every dollar to work every month and don’t carry over any money each month.
The drawbacks of this plan are that it requires a lot of monitoring and thought each and every month because you need to start over every month with a new plan based on the amount of income you have, putting every single dollar you bring in to work for you. The zero-based budget plan can be overwhelming for some people, but it works better if you have a lower income.
The 50/20/30 Budget Plan
Other people like using the 50/20/30 budgeting plan, which states that half your money is for all needs, 20 percent is for saving and investing, and 30 percent of your income is used for all your wants. Wants are defined as anything outside of a basic need. For example, if you can’t cover an expensive car under the needs portion of your income, you might take some from the wants to make up the difference.
When you set up a 50/20/30 budget plan, one thing that becomes clear is that you don’t have to think about the budget all the time. You know that you have a set dollar amount every month for your wants or discretionary spending and the rest is automated, so you don’t have to review it constantly.
Implement and Monitor Your Plan
Once you set up your budget, it’s essential to monitor it and track every action you take every single month. To ensure your success, you’ll want to take the following steps every single month and year.
Check All Statements for All Accounts
It might seem tedious but mistakes happen, as does theft. Keeping track of your accounts by looking at them online or studying the statements each month is critical. Check your interest rates, what’s coming in and going out, and make sure it matches your records.
Keep Track of Your Expenses
Even if you’re on the 50/20/30 plan, you must track those expenses that aren’t customarily tracked, such as your coffee shop purchase, your last-minute candy bar at the gas station, and so forth. Also, make it a habit to check up on auto subscriptions each month to ensure you’re really using them.
Use Technology to Keep It Straight
Today, there are all types of technologies that you can use to keep your finances in order, often right from your bank account. Budgeting tools, notifications, and even monitoring can be outsourced with technology to a point.
Note Areas of Improvement or Change
As you monitor, notice if your debts are going down or not and whether your investments and savings are performing as you wish.
Check Your Progress Yearly
Always check your yearly progress for all your savings and investments to ensure that you’re earning what you thought you would. By studying your progress and checking your goals, you may figure out new ideas you didn’t think of before.
Pull Your Credit Reports Yearly
Each year, you have a right to get a free credit report directly from the two major reporting agencies. Seeing what is on that report can help you keep your finances straight and avoid identity theft.
Reassess Your Goals Yearly
Each year, you’ll want to check up on all your accounts, take a look at your written goals, and ensure that you are progressing toward those goals as you thought.
Be Ready for Change
As you monitor your success with sticking to your plans, be ready to switch it up. For example, with a lost job, you have to move down to your emergency budget, which will slow down your investments. But since you planned and have the cash savings, it should not cause you to build debt.
Even if everything doesn’t go as planned, the fact is that with a plan, things will go more smoothly than without it. Sometimes the unexpected happens, but the longer you stick to your plan, the more likely you are to overcome a crisis should it occur.
Final Word
Now that we’ve gone over how important financial planning is, you’ll want to get started as soon as possible. After all, the sooner you set up and start implementing your plan, the sooner you’ll start to experience the rewards of the plan.
Who knows; with the right plan, you might end up retiring early and living abroad. Whatever your desires are can be reached if you set up a plan and follow it.
The Money Savvy Blog 