Are you saving enough for retirement? Do you have your assets where they need to be to optimize taxes and potential returns? These are just some of the questions I am sure people ask themselves and if they are not they should be. While everyone’s situation is different and there is no one correct answer these and many other things need to be addressed. It is important that you protect not only yourself but your family when it comes to financial matters. This blog will not be about telling you or anyone what the best single answer is because that answer depends on you and not everyone will or should receive the same answers. So let’s begin looking at how a financial plan comes to life in some basic terms.
First in order to have an idea of your financial health you must first understand your income and expenses. The first step will be to determine what your total income is and what makes it up. For many this is the wages that they earn from their jobs. But do not forget to overlook any bonuses you may receive from your job as well. If you have other outside sources of income you will need to gather and list those as well such as dividend income or interest income. This is also where you would list any gains or losses from investments that you have had over the past year. Also if you have any business income or rental income you would need to list it here as well. Add of these sources of income up and that is your total income that you will receive and it is what we will loosely base the rest of the plan on. This exercise needs to also be done for your spouse if you are married.
Now the second step is a little more complicated as it involves all of your expenses that are either dedicated or discretionary in nature. The difference between these two really has two parts. The first dedicated expenses are normally set and they are expenses that are mandatory that they be paid such as a mortgage, all of the taxes one pays, and any insurance premiums. You would also include any debt reduction that you may have in the form of loans or credit card payments. It is also a good practice to list savings for your emergency fund and any retirement savings in the dedicated expenses as you should always pay yourself first in any system. As for discretionary expenses those are expenses that may vary from payment to payment or they are expenses that are not considered essential. These expenses generally can be adjusted as the need arises and provide a degree of flexibility in the amounts that are allocated for each. Expenses that are discretionary in nature can be such things as entertainment, clothing, food, and utilities. Again these are items that are not set and provide places where adjustments can be made. Where a mortgage is a set payment the amount someone spends on entertainment is something that can easily be adjusted. Some discretionary items could be considered dedicated such as food and some utilities but look at it this way. When it comes to food you do not have to have a New York Strip steak for dinner when you could have a chicken breast. The same is true with utilities as in the winter instead of turning the heat up in the house put on extra clothes and save the money it would have taken to heat the entire house.
The first two steps in this process are basically budgeting. Most people consider budgeting to be a bad things but without a good budget it is impossible to even start on a financial plan or to get ahead financially in any manner. Budgets do not have to be elaborate or complex in nature. If you have the desire you can create your own budget in any spreadsheet program such as Excel. If you do not want to create your own for a nominal charge you can get the one I have created that allows someone to track all of their income and expenses. If you are interested in such a spreadsheet that tracks and compares your actual expense to your budget go to budget. If you do not want to create or use a spreadsheet there are some web based budget systems that will allow you to tailor your income and expenses and it will you access from any computer that has Internet access and Cash Control is one I recommend. To get it for a nominal annual fee go to Cash Control Budget. As an added tool I have created a spreadsheet that can go hand in hand with either of these budget tools or any budget you have created to use and that is a spreadsheet that will help anyone get out of debt by using the snowball method. Basically you will need to list your debts, amounts owed, interest rates, and minimum monthly payment owed. After you list all of your debts in the spreadsheet it will tell you how long it will take to pay off all your debts and how much you will pay in interest. If you are interest this spread sheet please go to debt reduction.
Regardless of how you do it before we go on to the next steps in our financial plan these first two must be completed. Take advantage of one of these two budget tools that have already been created or you can take the time to develop one of your own. The key here is to do these steps so we can then move on to the next steps in our journey.