Financial
Planning
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Financial Planning STEPS
Step 1: Determine Where You Are Financially
Step 2: Set Goals
Step 3: Develop A Plan
Step 4: Monitor Your Progress
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Step 1: Determine Where
You Are Financially
• Calculating Your Net Worth
• Analyzing Your Cash Flow
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Calculating Your
Net Worth
Net worth = what’s left
after you subtract your
liabilities from your assets
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Analyzing Your
Cash Flow
• Assessing your cash flow will:
• Indicate your ability to save
• Let you size up your standard of living
• Indicate if you're living within or beyond
your means
• Highlight problem areas
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Step 2:
Set Goals
• Questions to be addressed before
setting goals
• How long will you continue to work?
• What will happen with your income -
will it remain the same, rise, or fall?
• What will happen with tax rates?
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Step 2:
Set Goals
• What investment rates can you
reasonably expect?
• What about the rate of inflation?
• How much involvement do you wish to
have in managing your investments?
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Short-Term
Goals
• Pay off credit card and consumer debt
• Start savings plan
• Set aside cash for a contingency fund
equaling 3 months' expenses
• Acquire additional term life insurance
• Acquire individual disability insurance
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Medium-
Term Goals
• Start college savings plan
• Diversify investment portfolio
• Convert term life insurance policy to
cash-value policy
• Contribute maximum to 401 (k) plan and
IRA
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Long-Term
Goals
• Purchase retirement property
• Retire at age 62
• Maintain pre-retirement standard
of living during retirement
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Step 3:
Develop Your Plan
• Flexibility
• Liquidity
• Minimization of Taxes
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You need a plan that's flexible
Flexibility
enough to change with your
circumstances throughout the
major and minor life events you
experience.
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Most financial advisors
Liquidity
recommend that you have funds
available that are equivalent to 3
to 6 months of your expenses.
Appropriate locations for these
funds are checking, savings, and
money market accounts.
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Minimization Minimizing taxes must serve as
of Taxes a means to meet your objectives;
it isn't an end in itself.
An effective plan will minimize
both income taxes and estate
taxes.
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Step 4:
Monitor Your Progress
• Here are the general questions to
ask:
• Have your financial goals stayed the
same?
• Are you meeting your budget?
• Are you earning the investment rates
of return you anticipated?
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Step 4:
Monitor Your Progress
• To what degree is inflation affecting
your finances?
• Has your tax situation changed?
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Source :
Ernst & Young’s Personal Financial
Planning Guide
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