A Comprehensive Guide to Planning your financial future and growing your net worth (Step by Step Process)
Introduction:
Planning your financial
future and growing your net worth requires discipline, commitment, and
consistency. It is not an overnight process, but with a clear plan and
dedication, you can achieve your financial goals. This blog will provides step-by-step guide to help you plan your
financial future and grow your net worth.
Step 1:
Determine your net worth The
first step in planning your financial future is to determine your net worth.
Net worth is the difference between your assets and liabilities. To determine
your net worth, list all your assets, including cash, investments, real estate,
and personal property. Next, list all your liabilities, including mortgages,
credit card debts, and other loans. Subtract your liabilities from your assets
to determine your net worth. Knowing your net worth will help you assess your
financial standing and set realistic financial goals.
Step 2:
Set financial goals The next
step is to set financial goals. These goals should be specific, measurable,
achievable, relevant, and time-bound (SMART). For example, your financial goals
could include saving for a down payment on a home, paying off student loans, or
investing in retirement. Once you have set your goals, prioritize them based on
importance and urgency.
Step 3:
Create a budget Creating a
budget is crucial to achieving your financial goals. A budget helps you track
your expenses and income, so you know where your money is going. Start by
listing your monthly income and expenses, including housing, food,
transportation, and entertainment. Then, compare your income to your expenses
and look for areas where you can cut back on spending. Make sure to include
your financial goals in your budget and allocate funds accordingly.
Step 4:
Save for emergencies Unexpected
expenses can derail your financial goals, so it’s important to have an
emergency fund. Aim to save three to six months’ worth of living expenses in a
separate savings account. This fund will help you cover unexpected expenses
without relying on credit cards or loans.
Step 5:
Pay off debt Paying off debt is
crucial to achieving your financial goals. Start by paying off high-interest
debt, such as credit card debt. Make minimum payments on all your debts, and
put any extra money towards the debt with the highest interest rate. Once that
debt is paid off, move on to the next highest-interest debt until all your
debts are paid off.
Step 6:
Invest for the future Investing
is an essential part of growing your net worth. Consider investing in a individual
retirement account (IRA), or other investment vehicles that align with your
financial goals. Make sure to diversify your investments to minimize risk.
how do you achieve wealth? There is both a hard (monetary) and a
soft
(psychological) answer to this question, but certainly if your
financial affairs
are not in order, it complicates the summative belief that you’ve
achieved a
wealthy life.
Thus, implementing a
financial plan to manage the future is very important. If you have not
assembled such a plan, or even if you have not
thought about how best to manage the future, don’t worry—you’re not alone!
Most People are notoriously bad planners (and notoriously good
procrastinators), but the important point to
understand is that financial planning and wealth accumulation are a journey and
not a destination.
You need to begin the financial planning process and then
(hopefully) continue it as best as possible, with or without professional
assistance.
It will help you to do both—that
is, as a do-it-yourself planner, as many Individuals are inclined to be (either by conscious decision or by
default of Circumstances), or by becoming an educated consumer when seeking
the help of a financial planner. In addition, the book introduces you to a
simple way of thinking about the financial planning process: the following approach
to achieving lifetime wealth.
The steps in this approach are as follows:
• Protect your assets.
• Accumulate monetary wealth.
• Defend your wealth.
• Distribute this wealth during your lifetime for the benefit
of yourself and your family (and for the benefit of your
heirs
after your death).
The Steps in the Financial Planning Process :
As put forward in the Certified Financial Planner Board of
Standards Financial
Planning Practice Standards, there are six steps in the personal financial
planning process:
1. Establishing and defining the relationship with the financial planning
client
2. Gathering client data and determining goals and Expectations
3.
Determining the client’s financial status by analyzing and evaluating client
information
4.
Developing and presenting the financial plan
5.
Implementing the financial plan
6. Monitoring the financial plan
Although these steps are intended for the professional Certified
Financial
Planner (CFP) certificant, there are several tasks that you, as an
individual
intent on beginning the financial planning process, should also
undertake.
The first task is to gather your financial and personal records. A
formal, very
detailed data-gathering form and personal financial planning questionnaire
are included in this blog to help you with this undertaking.
Keeping good personal records has one very obvious advantage: it
lets you know where and how you are currently spending your money. In turn,
these records will assist you in constructing a budget for your monthly income
and expenses—a critical money-management tool for most individuals. (We talk
about budgets shortly.)
Record keeping also assists you in determining where you are
financially today. You can’t begin the journey of personal financial
planning
without knowing your starting point.
What type of financial and personal records should you keep, and
for how long should you keep them? In most instances, there is no single
answer to these questions, because the type and number of records you need
really depends on personal preference. Some of us keep everything (for as
far back as we can imagine), whereas others try to rid ourselves of paper
almost as soon as we receive it. However, documents like copies of insurance
policies, brokerage account statements, mortgage statements, deeds and leases,
notes receivable, and current statements of vested amounts in retirement plans
or other company-sponsored retirement plans should be kept indefinitely.
In addition, it is important to keep personal income tax returns
for at least three years.
No single document can tell you more about your financial life than
your annual income tax return.
Think about it: this return forces you to not only disclose the amount of your income, but
also identify the source of that income— an extremely important part of the budgeting and
financial planning process.
Under law, you are required to keep your income tax return and
supporting details for only three years from April 15
of any given year.
However, because of the wealth of information provided by the return and its importance as a guide to your financial past,
you may wish to consider retaining it for much longer.
Once you have determined what type of financial and personal
records you
should keep, the next step is to determine where to keep them.
Again, there
is no single answer to this question, but it will be better to keep these records in safe hands.
Another
critically important task to launch you on the path toward financial
Independence
is to specify in writing your long-term (more than ten years),
medium-term
(five to ten years), and short-term (one to five years) financial
goals.
Be as specific as you can with respect to these goals. For example, “to
become
wealthy” not only is hard to quantify for most people but, as mentioned previously,
may not even mean the accumulation of actual dollars. If monetary wealth is
important to you (as it is for most people), determine how many dollars you
need to accumulate in order to satisfy your written financial goals.
Here
are some of the most common financial goals mentioned to financial
planners:
• To retire early or at normal retirement age with an adequate level
of income
• To fund a child’s (or children’s) college education
• To buy a house or vacation home
• To make home improvements
• To take a dream vacation
• To reduce debt service (for example, to pay off credit cards with
an outstanding balance)
• To buy a luxury car
• To minimize income or transfer (estate) taxes
•
To start my own business
