Creating a Personal Financial Plan, Slides of Finance

Download Creating a Personal Financial Plan and more Slides Finance in PDF only on Docsity! Creating a Personal Financial Plan Overview Setting goals are important and often used to measure success. However, simply setting goals does not ensure you will someday accomplish them. Achieving goals requires establishing a plan. Planning is important to ensure a direction for your day-to-day actions. Being deliberate about establishing a plan can help guide the decisions you make to aid you in reaching your goals. The further your goals are from today, the more important it is to have a plan to ensure your success in reaching those goals. Think about it. You may not consult a map for a trip to the store across town, but you will probably want directions, or a plan, for a spring break trip to California. When it comes to personal financial goals, many can be long term. Paying off student loans, a new car, or a mortgage on a home does not happen in a month or even a year. Retirement is an even longer- term goal. When it comes to financial matters, planning can be of paramount importance. Creating a personal financial plan has six basic steps: 1. Determine your current financial situation 2. Develop your financial goals 3. Identify alternative courses of action 4. Evaluate alternatives 5. Create and implement your financial action plan 6. Review and revise the financial plan It is never too early to begin planning. In fact, the earlier you begin planning for your financial future, the sooner you will reach your goals. Because of the nature of interest and compounding that can be associated with investing, starting early can have great benefits. The longer your investments have to grow, the greater their growth will be. For instance, if you invest $5,000 today and receive a 6% annual compounding interest rate, your investment will grow to approximately $10,000 within 12 years. Within 24 years, the $5,000 investment would grow to $20,000 and within 36 years to $40,000. While a $5,000 investment at that rate made at age 48 would only grow to $10,000 by age 60, the same investment made at age 24 would grow to four times that value by the same age. As you can see, it can certainly be advantageous to get started planning for your financial future as early as possible. The worksheets on the following pages will help you navigate the six steps outlined above for creating your personal financial plan. Remember, your financial goals won’t be realized just by setting them. You have to be intentional about creating a plan and diligent in executing it. After all, directions to your spring break destination won’t do much good unless you follow them. Financial Plan Goals Worksheet Short-Term Goals (Less than 1 year) Priority Goal Total Cost Duration Monthly Cost Target Date Intermediate Goals (1-10 years) Priority Goal Total Cost Duration Monthly Cost Target Date Long-Term Goals (Over 10 years) Priority Goal Total Cost Duration Monthly Cost Target Date Step #3: Identify Alternative Courses of Action So far in the planning process you have evaluated your current financial situation and established some SMART short-term, intermediate, and long-term goals. But your goals won’t be accomplished simply by creating them. You will have to devise strategies to help you bridge the gap from where you are today to where you would like to be. Just as there is more than one way to get from campus to your favorite ice cream shop in town, there is more than one route you can take to achieve financial success as you have defined it. The next step of the financial planning process involves identifying alternative courses of action that can lead you to your goals. Let’s suppose you’re planning to study abroad next year. You’d like to be able to make the most of your experience while overseas and have enough financial resources to travel while abroad. You have decided you would like to have saved $4,000 by the time you depart in 15 months, specifically for your travel endeavors. Maybe your financial situation is such that, so long as it persists in its current form, you will be financially prepared for your travel adventures while abroad. But if you are like most college students, that is not likely. So what are your options for changing your current situation to make this goal a reality? We’ll say you currently have an extra $1,000 in savings from your last summer job that you are willing to shift into your semester abroad travel fund. This leaves you with $3,000 to generate over the next 15 months, or $200 dollars a month you will need to deposit into your travel fund to reach your goal. Thinking back to the budgeting and saving exercises from the previous chapter, perhaps you could decrease allocations to various expenses and shift more of your monthly income to savings for your travel fund. Recall the budget you created in chapter one. Maybe by limiting unnecessary travel and carpooling whenever possible, you could decrease your transportation expenditures by $75 per month. Perhaps by making more meals at home and limiting your new clothes purchases, you could cut your food and discretionary allowance allocations by $50 each. Going to discount movie theaters could help you decrease your expenditures on entertainment by $25 per month. By implementing good savings habits, you may be able to free-up enough of your current income to deposit in your travel savings so that in 15 months you will have reached your goal. But maybe you have already applied the principles of the saving activity from chapter one to your current budget and there is little for you to cut. Adding a new job or hours to an existing job may help you increase your monthly expendable income so you can contribute the needed amount to your travel savings. At a minimum wage of $7.25 per hour, about 7 hours per week would help you earn your monthly $200 contribution you need to be making to your study abroad travel fund. Generally, your alternative courses of actions will fall into one of two categories: reallocating existing resources, or generating new ones. Existing resources can be utilized by earmarking current savings or shifting current allocations as in the example above. Generating new resources may require changing jobs to improve your wage outlook, taking on additional hours or investing your savings more aggressively to generate higher rates of return. Goal Strategies Worksheet Select one of your short-term, intermediate, and long-term goals you established earlier. Consider the target date for accomplishing the goal and the monthly cost associated with the objective. Brainstorm three different strategies for reaching each goal, making use of a strategy from both categories discussed above. Short-term Goal: Target Date: Monthly Cost: Strategy 1: Strategy 2: Strategy 3: Intermediate Goal: Target Date: Monthly Cost: Strategy 1: Strategy 2: Strategy 3: Long-term Goal: Target Date: Monthly Cost: Strategy 1: Strategy 2: Strategy 3: