When it comes to managing money, most investors want to do it on their own. They usually want to save the cost and high fees but even when financial advice comes free, they still don’t want it. Since most people are taking the do-it-yourself, I would like to take the opportunity here to show you how to build your own financial plan without a financial planner.
Take to following 4 steps to create your own personal financial plan:
1.) Capture your current state
To get an overview of your finances, we recommend you focus on 3 areas: your assets, liabilities, and cash flow.
a) Assets are what you own, including things like vehicles, homes, collectibles, precious metals, and of course cash in your bank accounts and retirement accounts. Take inventory of all these things and assign a value to each.
b) Liabilities include any debts you owe, your mortgage, car loans, student loans, private loans to family and friends, credit card balances. Sum it all up and then subtract your total liabilities from your total assets. This will determine your net worth.
c) Cash flow is important to calculate because you need to know how much money is coming in every month and how much is going out (check your old bank statements). This will give you a snapshot of your monthly income and expenses. The difference is your cash flow. You should be aiming to see a positive cash flow. If you’re spending more than you’re making each month, you’ll quickly start to run out of money and have to resort to selling your other assets to free up cash.
2. Capture your future desired state
Once you’ve captured your current state, write down your future desired state. Set financial goals (short- and long-term) you would like to accomplish. Think about all the short and long-term goals you have in mind. It’s best to put a timeline on each of these goals and assign a dollar amount. Once you have numbers in mind and timelines attached, you can work backwards to figure out how much you will need to save to reach each goal.
3. Create a road map how y will get there
Figure out how exactly you’ll achieve each goal. Find out how quickly you can save up the necessary amount. This will give you an idea of how realistic your goal is. After running some numbers, you may realize you can’t save so much money so quick without taking unnecessary risks. Consider your monthly cash flow and expenses for this exercise.
4. Review Your Plan
Review your progress at least once a year, if not quarterly. It’s important to review your new current state. Have things changed? Are you spending less or more? Did your investments make more money than you thought this year? If things are not going as planned, it’s okay. The most important thing here is that you have a plan and you can recognize when your finances are heading into the wrong direction.
Financial plans are never set in stone. Circumstances change and your future state is no longer the same as you original. Reality is, your financial plan is a living document that you own and should be reviewing and updating on a regular basis.
But one thing is clear: without a plan, you have no clue whether you are close to reaching your future desired state or not. Plans help make your dreams a reality. So, follow these 4 steps and you’ll have a plan that will work.
Sven Franssen