Where are we now

The first part of our Financial plan – Understanding our financial Situation


Step #1:
Determine Your Current Financial Situation 

Before you can begin setting goals and developing strategies to achieve them, it is important to understand where you are now. The first step in creating your personal financial plan is determining your current financial situation. Having a thorough understanding of your current financial situation will help you to formulate realistic and well-informed goals. Taking a detailed look at your situation may also help you identify specific changes you could make to change your situation and help you achieve the goals you will create later in the planning process.
To gain insight into your current situation, it can be helpful to determine your current net worth. To calculate your net worth, you will need to total your current liabilities and subtract them from your total current assets. Assets are simply what you own that has value. These include: cash and cash equivalents, such as physical cash on hand, checking accounts, or savings accounts; personal property,
such as equity in a home, other real estate owned, or a car; and invested assets, such as stocks, bonds, or pensions. Liabilities include value of what you owe including current bills and outstanding debt.
Utilizing the charts below, calculate your current net worth.


Step #2:
Develop Your Financial Goals

Once you have evaluated your current financial situation, you are ready to move forward in the financial planning process. The second step is developing your financial goals. Setting goals will give you a direction for your plan and a destination toward which you want to head.

When creating financial goals, you will want to consider obvious objectives such as monthly savings or retirement investments. However, also consider other goals you have which may not immediately stick out as financial ones. The goal of backpacking through Europe upon graduation may not seem like a financial goal on its face. But, when considering the cost of a three-week European vacation, you may
want to think about adding this goal to your personal financial plan. Do you think you may need a new computer within the next couple of years? Maybe add purchasing a new computer in two years to your list of goals.

Anticipating future expenditures you would like to make and incorporating them into your financial plan can help you put yourself in a position to afford them as they arise without having to make sacrifices elsewhere in your budget.

As you develop your financial goals, recall the first tip from Chapter One which discussed setting your goals. Your goals should be SMART, that is specific, measurable, attainable, realistic, and time-based.

You should also develop short-term, intermediate, and long-term goals. Developing each of these types of goals will allow you to achieve success early in the plan while also keeping your eye on the future.

Short-term or intermediate goals may also serve as stepping stones to reaching long-term goals. For instance, a short-term goal of saving $200 a month may help you accumulate funds for the down payment on a home. An intermediate goal of paying off student loan debt a year ahead of schedule may help you free up monthly income that could instead be used to make a car payment.

When developing your goals, be sure to differentiate between necessities and wants. Establish priorities. Consider the net worth you calculated in step one and how realistically your goals align with your current financial situation.
Considering the points in this section, reexamine the financial goals you set in Chapter One. Using the worksheet on the following page, add to, amend or re-record those goals for incorporation into your personal financial plan. Be sure to prioritize your financial goals in order of their importance to assist you later in the planning process.
Once you have set your goals, refer to your target date and the duration of your goals’ costs to determine a monthly cost that will be associated with working toward your goal.