The Personal Financial Planning Process

Personal Finance — The Personal Financial Planning Process:


An understanding of finance is key to successful investing. Personal Finance – Turning Money Into Wealth (6th Edition) identifies five basic steps to personal financial planning:

Step 1: Evaluate Your Financial Health
• A financial plan begins with an examination of your current financial situation.
• Prepare a personal balance sheet.
• Determine what you’re worth and prepare a personal income statement.
• Use ratios to monitor your financial health.
• Determine where your money comes from and where goes.
•To survive financially, you have to see your whole financial picture, which requires careful recordkeeping, especially when it comes to spending.

Step 2: Define Your Financial Goals
The second step of the financial planning process is defining your goals. Identify what you are saving for and how much you need to save, which entails: (1) writing down or formalizing your financial goals (2) attaching costs to them, and (3) determining when the money to accomplish those goals will be needed.

Step 3: Develop a Plan of Action
The third step of the process is developing an action plan to achieve your goals. Make your spending conform with your budget goals. A solid personal financial plan includes:
(1) an informed and controlled budget, (2) determines your investment strategy, and (3) reflects your unique personal goals.

Although everyone’s plan is different; some common factors guide all sound financial plans: flexibility, liquidity, protection, and minimization of taxes.

Flexibility – your financial plan must be flexible enough to respond to changes in your life and unexpected events such as losing your job or market fluctuations.

Liquidity – The relative ease and speed with which you can convert non-cash assets into cash. In effect, it involves having access to your money when you need it.

Protection – Insurance offers protection against fire,flood, major illness and death (at reasonable rates) shielding you from costly events that would otherwise threaten your financial security.

Minimization of Taxes – every sound financial plan must take taxes into account. While you want to pay as little in taxes possible, your goal in effect is not to minimize taxes but to maximize the cash available to you after taxes have been paid.

Step 4: Implement Your Plan
Just do it! While you don’t want to become a slave to your financial plan, you will need to track income and spending, as well as keep an eye on your long-term goals.

Step 5: Review, Reevaluate, and Revise Your Plan
As time passes and things change-you must review your progress and re-examine your plan. Your financial plan is not the goal; it is the tool you use to achieve your goals.

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About Carlisle Mitchell

Carlisle Mitchell Insider Tips for Investors is a trusted and reliable source of investment & market analysis for real estate investors world-wide.
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