Personal financial planning is the process of organizing your financial goals into a workable plan so that you can live with
financial security in the style you desire. It involves proper handling of cash flow, assets, and liabilities. Financial planning
is the way to get from where you are now to where you want to be. It brings the future into the present, while there's still
time to do something about it. To quote Peter Drucker, "the best way to predict the future is to create it."
The planning process is straightforward:
1. Determine what you have.
2. Determine what you want.
3. Determine how to get what you want, using what you have.
Determining what you have involves preparing a Personal Financial Statement. This document lists your assets, liabilities,
and net worth. Also, a Cash Flow Statement may be prepared. This document tracks your personal cash receipts and disbursements
over a period of time.
What do you want to achieve? Do you have short-term financial goals (e.g. eliminating credit card or other high-cost consumer
debt, building an emergency fund, buying a car or home, starting a regular investment plan)? What about your long-term objectives?
What are your lifetime goals? What must you accomplish in life? How do you enjoy spending free time? What are your hobbies?
Are there hobbies you've not pursued, or that have gotten rusty from inactivity over the years? Visualize how you would spend
time if money were of no concern. Where are you? What are you doing? Although each of us conjures up a unique picture, we
often have many of the same thoughts:
- Financial independence (you are not dependent on the state or federal government, your children, your parents, or your paycheck).
- No financial worries.
- Own a nice home
- Help children get a college education.
- Own a nice vacation property
Many people find their vision of the future is unrealistic, given their modest level of saving and investing. Many find they
need to modify their expectation of the future. Although this process may be a bit humbling, it should not discourage you.
It's far better to modify you expectations, and have an accurate picture of the future, than to have no idea whether or not
your picture is feasible. If you remember nothing else, remember that it is never too late to begin. Start today.
What are the biggest threats to your future financial security?
- Doing nothing.
- Failing to diversify
- Investing too little.
- Investing too conservatively.
- Failing to insure against catastrophic risks.
Why doesn't everyone plan for their financial future? Common reasons given include:
- "I don't make enough money. My income level doesn't warrant planning."
- "The future will sort itself out."
- "I've already waited too long. It's too late to start now."
- "I'm afraid of what I might find. The truth might be painful."
- "When I win the lottery, it won't matter anyway."
In fact, retirement planning is probably more critical for people with modest income than for the very wealthy. I'm sure we
can all think of people in their 'golden years' that are not enjoying an idyllic existence. What's the good news? Each of
us has the power and ability to profoundly influence our personal financial future. We can do something about it.
The first and most important rule of retirement planning is to pay yourself first. If you're under age 40, set aside 10% to
15% of your income each year. If you're older and haven't started investing, you may need to set aside a higher percentage.
The easiest way to do this is to set up an automatic withdrawal or transfer from your bank or checking account. On a certain
day each month, have 10% or 15% of your monthly income subtracted from your account and transferred to a high quality, no-load,
low-cost mutual fund. The idea is simple – you can't spend what you don't have. After all, it's human nature to spend all
our disposable income. For proof, recall how quickly your expenses increased the last time you got a pay raise! All of the
sudden, it was time to buy that new car or bigger house.
According to an American Animal Hospital Association (AAHA) Veterinary Career Survey, retirement potential ranked above average
in terms of importance, and below average in terms of satisfaction. Increasingly, people are focused not just on how to meet
this month's payments, but also on their longer-term financial goals and objectives. Common examples include funding a child's
college education, and achieving financial independence. Financial independence is that point in time when you have acquired
sufficient assets to spend time however you choose. It doesn't matter whether you choose to continue working, or hang it up
and travel the world. Having sufficient resources allows you the freedom to do whatever you want. With the aging baby boom generation, unprecedented numbers of people are closely considering their