PERSONAL FINANCE. financial planning & goal setting

PERSONAL FINANCE financial planning & goal setting 1

our mission To lead and inspire actions that improve financial readiness for the military and local community. 2

table of contents The Power Of Planning... 02 Step 1: Identify Your Financial Goals... 04 Step 2: Calculate Your Net Worth... 07 Step 3: Identify Your Sources Of Income... 10 Step 4: Assess Your Resources... 14 Step 5: Save For Your Goals... 16 Step 6: Plan Ahead... 20 Step 7: Update... 22 1

the power of planning Today, individuals are living longer and healthier lives. That means it s more important than ever to develop a financial plan that will help you enjoy a longer and more active retirement. This book provides seven steps, with helpful work sheets, that you can follow to identify your goals and establish a financial plan for a secure future. Many things can affect the quality of your retirement. Changes in employer-sponsored benefit plans, economic events that force an early retirement, investment performance, rising health care costs, an unanticipated long term care event, and potential future changes in Social Security benefits are all beyond your control. That s why it s important to control what you can, by mapping out your financial plan and revisiting it on a regular basis. Financial worries aren t necessarily caused by a lack of money, but from a lack of planning. Solid financial planning can help take the uncertainty out of your financial future and provide a process that allows for course correction as circumstances change. The purpose of this publication is to help you begin the process of establishing financial goals and structuring your financial plan. You can use it as a tool to identify the many things you need to consider in developing your own plan. Or, if you seek the advice of a Certified Financial Planner (CFP ) practitioner, these completed forms will facilitate the consultation, and help the professional align your budget and investments with your personal goals. 2

step one IDENTIFY YOUR FINANCIAL GOALS step two CALCULATE YOUR NET WORTH step three IDENTIFY YOUR SOURCES OF INCOME step four ASSESS YOUR RESOURCES step five SAVE FOR YOUR GOALS step six PLAN AHEAD step seven UPDATE Certified Financial Planner Board of Standards, Inc., owns the certification marks CFP and Certified Financial Planner in the U.S. which it awards to individuals who successfully complete CFP Board s initial and ongoing certification requirements. 3

STEP 1: identify your financial goals The best way to start saving is to have a clear idea of what you re saving for. When your financial plan includes specific savings and investment goals, you have something to work toward and that can help keep you focused. It is recommended that you target at least 10 to 15 percent of your net income (i.e., take-home pay) to save and invest each month. Generally, the best way to achieve this goal is to pay yourself first by establishing an automatic withdrawal that goes directly from your paycheck to a savings or investment account each pay period. Determine your goals You ll want to select someone you trust completely. This person could be your spouse, a parent, a friend or a financial planning professional. Whoever it is, you ll want to make sure that person is capable of managing your family finances accurately and responsibly. Once you ve chosen someone, familiarize this individual with all aspects of your financial situation. 4

0-3 years Establish and implement a spending plan for income so you spend less than you earn. Create an emergency fund of at least 3 to 6 months of basic living expenses. Establish a good credit reputation. Pay off your high interest rate debt. Implement a disciplined savings and investment plan. Purchase a vehicle. Purchase insurance coverages appropriate for your situation. Prepare and execute your will and power of attorney. Save for a family vacation. Financial planning involves a bit of soul searching to prioritize your wants and needs. Consider the following steps to help you define, plan and begin saving to meet your financial goals: Examine Your Current Financial Situation Are you spending less than you earn? What is your net worth? Define Your Goals What do you want to accomplish? What will happen if some of your goals are not accomplished? Set An Amount How much money do you need to achieve each goal? 3-7 years Make the down payment on your home. Plan for a wedding. Prepare for the birth or adoption of a child. Provide for your advanced education. 7+ years Plan and save to meet your income, healthcare, and long term care needs in retirement. Plan and save to meet your housing needs in retirement. Provide for your children s college education. Plan to support aging parents. Set A Target Date When do you need to meet your goal? Write Down Your Goals Listing them in black and white can help you assess what you really need or want. Prioritize This will help you follow a clearly focused plan. Develop A Plan Establish a budget that includes your financial goals. Review Your Progress Periodically review your plan and make adjustments as necessary. 5

financial goals work sheet This Financial Goals Work Sheet is offered as a tool you can use to articulate and list your financial goals. For example, if your goal is to buy a home, you may list down payment on a home as your goal. Next, set the target date for when you would realistically like to accomplish the goal and list it in one of the three timeframe columns. Finally, determine the amount of money you will need. Record the amount required next to your planned goal accomplishment date. When you complete the Financial Goals Work Sheet, you are ready to proceed to Step 2. GOALS -3 Years 3-7 Years 7+ Years Time $ Needed Time $ Needed Time $ Needed New vehicle down payment 2 years $10,000 Down payment on home 5 years $40,000 Retirement 20 years $100K 6

STEP 2: calculate your net worth Once you have articulated your financial goals, the next step is to determine the resources you will need to help you accomplish those goals. This requires an objective assessment that results in a list of the items of value that you own (assets) and the amount of money you owe (liabilities). Knowing your net worth is important because it keeps you in touch with your money and is a quick and simple way to determine if you are making progress towards accomplishing your goals. By completing the Personal Financial Statement form included here, you can calculate your net worth. First, add up the value of your assets your home, investments, jewelry, etc. Then add up the amount of your liabilities loans, mortgages, credit cards, etc. Subtract the amount of your liabilities from your total assets to determine your net worth. Be sure to use actual market values what your property would be worth today if you decided to sell it and what your loans would cost you today if you decided to pay them in full. 7

personal financial statement ASSETS Cash Checking accounts Saving accounts Money market accounts Certificates of deposit (CDs) Cash value of life insurance policies Retirement plans Pension/profit-sharing plans (money owed you if you leave your employer today) $ VALUE Keogh plans IRAs 401(K) Emergency fund Stocks/Bonds/Mutual Funds Real estate investments Money owed to you Rental or vacation property Miscellaneous property Other investments Your home Vehicles Furniture/appliances Jewelry/furs Collectibles/artwork Other Total value of all assets $ 8

personal financial statement pt. 2 LIABILITIES $ OWED Mortgages Personal loans Vehicle loans Credit cards Education loans Investment loans Life insurance loans Other TOTAL LIABILITIES $ CALCULATING NET WORTH Record the total value of all assets $ Less total liabilities - $ NET WORTH* = $ *If your net worth is negative, you may need to focus on cutting your spending and repaying your debts. 9

STEP 3: identify your sources of income Net worth is just one aspect of your financial situation. Once you have completed your Personal Financial Statement and have a sense of your net worth, you are ready to identify the income resources available to help you achieve your goals, plan for expenses, and create a working monthly budget. Income from resources such as salary, investments and retirement are important in helping you to achieve your financial goals. Also include any regular, supplementary sources of income, such as a part-time job. When calculating your personal finances, be sure to include income from all of these resources. After you determine how much is coming in, be realistic in recording how much is going out and where it is going. Create your spending plan The Budget Work Sheet is a tool to help you estimate your current monthly income and expenses. You ll probably want to have your bank statements and credit card account statements handy for quick reference. Recording your expenses and analyzing your spending habits is a good practice. It can help you identify where to make adjustments so you spend less than you earn bringing you closer towards accomplishing your financial goals. When you have completed the Budget Work Sheet, you are ready to move on to Step 4. 10

budget work sheet INCOME FOR THE MONTH OF: AMOUNT Monthly gross income (total income before deductions) = $ Other income (interest, etc.) Total Monthly Gross Income = $ DEDUCTIONS FITW - Federal Income Tax Withholding (if applicable) $ SITW - State Income Tax Withholding (if applicable) FICA - Social Security FICA - Medicare Other deductions (for example, Flexible Spending Account) Total Deductions = $ Total Monthly Net Income (total monthly gross income minus total deductions) = $ EXPENSES AMOUNT PLANNED ACTUAL CHARITABLE GIVING Place of worship $ $ Other SAVINGS/INVESTMENTS (target at least 10% - 15% of monthly net income) Emergency fund $ $ Retirement accounts (IRA, 401(k), etc.) Other HOME/UTILITIES Food $ $ Rent/Mortgage payment Property taxes ( of total annual expense) Utilities Home maintenance Furniture 11

budget work sheet pt. 2 EXPENSES (CONTINUED) AMOUNT PLANNED ACTUAL Phone/Mobile phone Internet service provider (ISP) DEBT Credit cards $ $ Loans INSURANCE Auto $ $ Property (renters, homeowners) Health Life Long-term care Disability EDUCATION Tuition $ $ Room/Board/Travel Books/School supplies/uniforms TRANSPORTATION Vehicle payment $ $ Gasoline/Parking/Tolls/Public transportation Vehicle maintenance Registration/License fees ( of total annual expense) PERSONAL Clothing $ $ Laundry/Dry cleaning Grooming (hair care, toiletries, etc.) Child care (baby sitters, child care center) 12

budget work sheet pt. 3 RECREATION/ENTERTAINMENT Vacations (1/12 of total annual expense) $ $ Entertainment/Dining out Hobbies (for example, golf or tennis equipment and fees) Club fees/organization dues Cable/Satellite television TOTAL MONTHLY EXPENSES = $ = $ CALCULATE MONTHLY CASH FLOW AMOUNT PLANNED ACTUAL Total Monthly Net Income $ $ Less Total Monthly Expenses - $ - $ Net Cash Flow (Deficit)* = $ = $ * If your net cash flow is positive, you can save more for emergencies or other financial goals. If negative, you will have to cut expenses or increase income (by taking a second job, for example) to reduce or eliminate debt. 13

STEP 4: assess your resources Now that you have identified your financial goals, calculated your net worth and determined your income, the next step in developing your financial plan is to assess all of your other resources that is, any emergency funds and insurance policies that will help protect you against unexpected setbacks. Emergency funds and insurance This assessment should begin with a look at your financial foundation the savings and insurance coverage you have in place to protect you when unplanned events threaten to keep you from meeting your goals. A strong foundation begins with an emergency fund of easily accessible savings. Most experts recommend that people set aside a fund that covers at least three to six months of basic living expenses to offset such events as sick leave, unemployment or unexpected bills. If you don t already have an adequate emergency fund, consider making it a priority on your list of financial goals. Keep your emergency fund in a liquid account one that makes it easy to quickly access your cash such as a savings or money market deposit account. CONTINUED 14

CONTINUED Even an emergency fund cannot prepare you for catastrophic loss or illness. Most individuals buy insurance for these costly emergencies. The most common types of insurance include: auto, property (renters, homeowners), health, life, long-term care, and disability. It is important to review your current coverages at least annually to determine if you have adequate protection. For health and disability protection needs remember to factor in coverages such as Medicare, Social Security Disability Insurance and workers compensation insurance. For life insurance protection needs exercise caution when factoring in coverage provided through your employer s group plan. Before factoring in such coverage consider the following: If you change jobs, will your new employer offer group life insurance coverage? If you do not have access to group plan life insurance coverage, has your health declined to a point where individual life insurance premiums are too expensive? Are you even insurable? Will your current employer offer you the opportunity to convert your existing group plan life insurance coverage to an individual policy at a much higher premium? If you become disabled and begin receiving long term disability benefits, will you lose your employer provided group plan life insurance coverage? Will your current employer offer you the opportunity to convert your existing group plan life insurance coverage to an individual policy at a much higher premium? Consult your employer for details. You should also contact your attorney regarding your estate planning documents; these typically include a will, durable power of attorney and health care directives. 15

STEP 5: save for your goals Once you have secured your financial foundation protecting yourself with an emergency fund and adequate insurance you are ready to begin saving and investing for your financial goals. This requires you to identify the gaps between your financial goals and your available resources. Once you ve taken an objective look at these, you re positioned to find ways to combine the two. Completing the Savings Goals Work Sheet This tool helps you develop a real-world plan to achieve your financial goals by breaking them down according to how much and by when. For example, you probably don t expect to pay cash for a house but should have an idea of when you want to be in position to make a down payment. Your need for a car, or to pay off education bills, may be more pressing. 16

Here are guidelines for using the Savings Goals Work Sheet : GOALS Record the goals you listed on the Financial Goals Work Sheet in Step 1. TARGET DATES Record the target dates of your goals. AMOUNT NEEDED Estimate the amount needed for each goal using today s dollars. Example: If your goal is to make a 20 percent down payment on a home valued at $200,000 today, you would need $40,000 for the down payment. You would enter $40,000 under Amount Needed even if your target date is several years away. CURRENT ASSETS Identify any assets on your Personal Financial Statement from Step 2 that you are willing to commit to your goals. Then, indicate how much you would like to allocate to each of your goals. Example: If you have $20,000 saved in a money market deposit account, you may decide to allocate half of it to the down payment. In this case, you would write $10,000 under Current Assets. GAP Indicate the gap between the cost of each goal and the assets you have allocated to it. NUMBER OF YEARS TO TARGET DATE Enter the number of years between now and your target date. AMOUNT TO BE SAVED EACH YEAR Divide the gap amount by the number of years to the target date. That amount will be what you need to save each year to reach your goal. TOTAL Add all the amounts to determine the total amount you will need to save annually to reach your goals. This amount does not account for interest, appreciation or depreciation on assets which are committed to your goals. 17

savings goals work sheet GOALS TARGET DATES AMOUNT NEEDED CURRENT ASSETS GAP NO. OF YEARS TO TARGET DATE AMOUNT TO BE SAVED EACH YEAR Down payment on home October 2018 $40,000 $10,000 $30,000 5 $6,000 18

Adjusting your plan If the amount you are now saving falls short of the amount you need to save to reach your goals, try asking yourself these questions: Are you paying yourself first, with a disciplined saving and investment program that saves at least 10 percent to 15 percent of your net income? Could you increase the amount you are saving? Could you earn more and spend less? Are you spending too much on impulse purchases and neglecting long-term savings goals? Are your goals too ambitious? Finding the gaps Now look back at the Savings/Investments line on your Budget Work Sheet from Step 3. How does the amount you are currently saving compare to the amount you have determined you should save each year in order to reach your goals? Use of the Savings Goals Work Sheet can encourage you to work on your goals today. It assumes your pay increases and returns on investments will only keep pace with the rate of inflation. Some individuals discover they are saving more than enough to meet or exceed their goals but for many, this isn t the case, and increases in savings are needed to keep up with inflation. Could you change or eliminate any of your goals? Could you delay any target dates of your goals? What is the impact on you and your family if your goals are not accomplished? With these questions in mind, take another look at your Savings Goals Work Sheet (Step 5) and at your Budget Work Sheet (Step 3). Make adjustments in both until your actual savings is equal to your goal savings. When you have completed your adjustments, you should have a savings plan for the current year and a forecast for your future. It s important to repeat this exercise annually and adjust as appropriate. If your income increases for example, if you receive interest and dividends, unexpected bonuses or find other ways to accelerate your savings then you will be able to accelerate your progress toward your goals. Be prepared to modify your goals if you suffer a setback. The key is to remain flexible. 19

STEP 6: plan ahead Now that you have completed your analysis, it is time to create your action plan. This means refining both your savings plan and your investment plan to optimize progress toward your financial goals. Your savings plan Your Savings Plan is essentially a commitment you make to yourself regarding both the amount you plan to save and the method you will use to save it by month and per year. An effective savings plan begins by writing out these basic elements: 20

Amount to be saved this year Start saving early. The earlier you begin, the more money you can potentially accumulate. Amount to be saved each month Watch your expenses; save any pay increases. Either put the money into your retirement plan or into another savings plan. Watch your expenses; save any pay increases. After your emergency fund is established, direct savings to your employer sponsored plan taking full advantage of any employer matching contributions before saving for non retirement goals. Your investment plan Next, examine your financial goals (listed in Step 1) to determine whether each is a short-term (less than three years), intermediate-term (three to seven years) or longterm (more than seven years) goal. This will be determined by the length of time you have until the goal s target date or until you will need the money allocated to that goal. For example, if you want to save for a child s college education, and the child is 8-years old,that would be a long-term goal that you want to start saving for right now. For each of your goals, consider how much investment risk you are willing to take for the goal, given its timeframe. Do you want to set up a simple savings account, or a longer-term investment in something like stocks or bonds? Generally, the riskier an investment, the more it fluctuates in value. Generally, its potential return may be greater, but so is its potential loss. To determine how much risk you are willing to take for each of your goals, consider the following: How essential is the goal? Describe your methods Commit to specific savings methods. Establish an automatic savings plan, such as having money deducted from your pay or your bank account and deposited in a savings account. How long before your savings will need to be allocated to the goal? Can you afford to lose any or all of the money you are investing? Do you want to protect that money even if it means potentially lower returns and not accomplishing 100 percent of the goal without saving more? A financial professional can help you set up an investment plan that matches your resources, goals and risk tolerance. This option is discussed in the next step. 21

STEP 7: update Your financial plan, just like your real-world financial situation, is subject to change. Make it a point to review your finances and adjust your goals and plans for reaching them at least once each year and at significant life events such as marriage or divorce, the birth or adoption of a child, a job promotion or unemployment, the purchase of a home or other property, relocation, or the death of a spouse or heir. A good time for your annual review is when preparing your federal income tax return, because you will have your financial records readily available. Evaluate your life-long goals and anticipate the following economic factors that affect your plan: Rate of inflation Your federal income tax bracket Interest rates Overall economic conditions and the impact these have on your current financial situation Assess your resources and update your work sheets, so you can see what adjustments you need to make to stay on track with your financial plan. 22

Consider professional assistance Many things can interfere with your ability to initiate a solid financial plan and for many people, choosing the right investment plan is pretty intimidating. You may want to consider working with a CERTIFIED FINANCIAL PLANNER (CFP ) practitioner if: You want to improve your overall financial situation but do not know where to start. You would like a professional to evaluate your existing financial plan. You need financial advice on investment, risk management, or estate planning strategies. You need financial advice that addresses changing family circumstances. You have experienced a significant life event. You do not have time to build your own financial plan. You need help balancing multiple goals and limited financial resources college planning vs. retirement planning. SELECTING THE RIGHT FINANCIAL PLANNER Don t be afraid to ask questions: Ask people you respect for names of financial planning professionals they have worked with. Ask about the financial planner s background and work experience. Ask the planner as many questions as you need to understand and feel in control of your financial future. A true professional will encourage questions and show interest in tailoring a plan to meet your needs. Facing the future with confidence Financial uncertainty can cause worry and needless stress. Using these recommended seven steps to understand your financial situation and plan your financial future may seem intimidating at first, but ultimately, it can lead to true peace of mind. You may not be any richer, but knowing where your finances stand right now, where you would like to be, and what resources you have to make that possible, will help you face the future with confidence. 23

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