Financial Goals

There are four key phases in the financial planning process that help meet financial goals:

1. Identify financial goals.

2. Determine net worth.

3. Estimate and balance income and expenses.

4. Implement and modify the financial plan:

a. Review personal debt situation.

b. Allocate savings and investments to reach goals.

c. Modify as needed.

Phase 1: Financial Goals.

The first phase in designing a financial/investment plan is to identify individual goals. Saving and investing is easier with specific goals in mind. Goals can be divided among different categories, including short-term, medium-term and long-term needs and wants:

Needs are short, medium or long-term goals that must be met. Examples are paying off a credit card, paying for a college education, and saving for retirement.

Wants are short, medium or long-term goals that are not absolutely neccessary. Examples are saving to buy a new coat or for a special vacation, and even saving for a down payment on a house.

It is extremely important to set a manageable number of goals that are attainable rather than an overwhelming number that are unrealistic. The first step in Phase 1 is to make a list of all goals and then priortize them according to importance and the time it will take to reach them:

Short-term goals are those to be reached within a year. Examples of short-term financial goals my include building an emergency fund, saving to buy a new coat, paying off a credit card, or establishing a holiday gift fund.

Medium-term goals may be int one to five-year range, such as saving and investing for a first home, college expenses, and starting a family.

Long-term goals are those that may not be reached for five- ten or more years. Examples of typical long-term goals are financing a new business and investing for a comfortable retirement.

After identifying personal goals, the next steps are determine the cost of these goals.

Set a date for completing each goal.

Estimate how much will have to be saved and or invested each month to reach each goal.

Phase 2: Net Worth Statement.

You now know what you want to achieve with a financial/investment plan, so it is time to determine where you stand. To do this, you will have to prepare a net worth statement (and be prepared to modify it annually). A net worth statement - or personal balance sheet- is a comparison of what each of us owns (assets) and owes (liabilities) at a specific time. It is a snapshot of an individual's or household's financial condition at a certain point in time. Follow these steps to determine personal net worth:

*List the market or resale value of all assets.

*List all liabilities or money owed to others.

*Determine total assets and total liabilities.

*Subtract total liabilities from total assets.

*Determine if there is a positive or negative net worth.

Many young adults will have a low or negative net worth as they incur debt for schooling an other large expenses.

Phase 3: Income and Expense Statement.

An income and expense statement, sometimes called a cash flow statement, lists and categorizes the money an individual receives and spends. It is a financial planning tool that helps you to determine the following aspects of their financial picture:

*The amount of money to be set aside for future goals.

*The extent of personal debt.

*The amount of interest being paid.

*How to pay off debt faster while still saving and investing for future goals.

The income and expense statement is usually prepared on a bi-weekly or monthly basis. The statement comprises an income component and an expense component. Income is payment received as a result of investments, interest, or work.

Record all money that they expect to receive during the coming year. Begin with regular income, such as wages, gifts, allowances, interest, and dividends, and then add any other money that may come in. List the amounts and total them to determine how much money will be received.

An expense is an outflow of money. Because saving money is simply withholding it from current spending, it is considered an expense. Use old records, receipts, bills, and canceled checks to estimate future expenses. It is helpful to keep records for two or three months to see where money is being spent. Periodic expenses such as car insurance can be broken down into monthly amounts in the budget. List the expenses and determine how much money was spent during the previous 1-3 months.

After you complete the income and expense statement, consider areas that can be cut back and areas that should be increased. There are several options to consider if the income or the expenses exceed each other. For example, if the income is greater than the expenses, increasing savings and investments may be an option. However, if the expenses are greater than income, it is wise to postpone some purchases, cut expenses, or identify additional sources of income:

Consider the following if expenses exceed income:

*What expenses can be reduced?

*Which expenditures can be postponed?

*How can income be increased?

Consider the following if your income exceeds expenses:

*Increase savings or investing for goals. This should be your top priority.

*Satisfy more immediate wants.

*Increase giving to worthy causes.

The challenge here is to balance income and expenses to live comfortably now while saving for future goals. In the long run, people who live within their income are more likely to enjoy the freedom that comes with being financially independent.

Phase 4: Implement and Modify the Plan.

The final phase in developing a personal financial/investment plan is to implement and modify the plan. This includes several steps:

1. Review Personal Debt Situation: Credit allows individuals to have and enjoy things now and pay for them later. It is convenient and can be a cushion in emergencies. But credit costs money(this is especially true for people who have no track record of repayment of debt) and can encourage overspending. People who do not pay their debts in a timely manner will soon have an unfavorable credit report, which can influence their ability to obtain new credit for years to come.

How much debt is affordable and realistic? One rule of thumb is that no more than 20 percent of a household's take-home pay should be committed to consumer installment and credit card debt. Paying cash is almost always less expensive than using credit. When credit is used, it is best to borrow as little as possible, seek the lowest finance charge, and pay off the loan as soon as possible.

2.Allocate Savings and Investments to Reach Goals: The best way to take care of financial needs is to "pay yourself first". That is , establish a set amount to save and invest each payday rather than immediately spending it on wants. The habit of saving regularly for future goals is a powerful financial tool, even if the amount saved each payday is small. People living at low income levels may find it diffcult to save money because most of their income is needed for living expenses, however, even a few dollars a month can grow and contribute to improved financial security.

3.Implement the Plan. There is more information about different saving and investment alternatives available. There is nothing wrong with choosing a financial professinonal to help you set up your plan. The key things you will need to consider when it comes to setting up an investing plan are:

*Risk tolerance. Younger people have more time to invest, so they can take more risks and look at more aggressive investment alternatives. The greater the risk one is willing to take, the more money tha can be made. Key factors that determine your risk factor are age, income, and investing experience.

*Time horizon. The number of years one has to invest- and how long one has to achieve one's key short, medium, and long-term goals- will be one of the major ways to choose investment products. For example, if an individual will need money in five years, he or she wouldn't want to invest in a bond that tied up funds for 20 years. Investment products are like tools- when the "right tool" for the job is used, investors get the best result.

*Diversification. Investors shouldn't put all of their eggs in just one or even two baskets. Buying an investment product- such as a mutual fund- that invllves multiple investments reduces one's overall level of risk and increase long-term potential for making a profit- thsi diversification of investments. Investors seek the dual goals of growth and safety by distributing their investments among the three major sset classes: stocks, bonds and cash or cash equivalents. Investing in all three categories helps shelter against major losses. This is true because stocks, bonds, and cash investments not only produce returns in different ways,they also tend to provide their strongest returns at different times. In most time periods, if one asset class is performing poorly, the other two ar doing better.

*Asset allocation. Financial/investing plans are like fingerprints. Every person needs a financial plan that is suited to his or her specific needs. The right mix of stocks, bonds, and cash is the ideal asset allocatin scheme. How this customized approach is put together can have major implicatins for return on investments. You should recognize tha asset allocation is a two-step process: First they assign a percentage of their entire portfolio to each asset class- stocks, bonds and cash. Second, they select a variety of investments within each of the three classes to make up that percentage. You personal situation will determine what percentage of their portfolio is assigned to each class.

4.Review and Modify the Plan Aa Needed. A financial/investment plan is an ongoing process. It is a tool to help individuals reach their financial goals. Reviewing and modifying the plan is essential to the effectiveness of the overall plan. An important goal of a financial plan is to protect against financial risk.

Home