The Financial Plan Chapter 2

‘Your Financial Plan’ Involves your individually specific financial goals Describes spending, borrowing, and investing needed to reach goals A financial plan has ‘7 key parts’ ‘Like a road map’ ‘Steady progress towards your goals’

#1 – Plan for Budgeting and Taxes Budgeting – forecasting future income and expenses A budget includes 3 steps a)Identifying your income –Wages earned b)Consider impact of taxes –‘Taken out’ of your paycheck c)Identifying your expenses −What bills do I have to pay?

When compiling your budget, you should also consider what your net worth is… a.k.a. = ‘your wealth’ “Where are you right now, financially?” –Money in bank? –What do I ‘own’? –Do I ‘owe’ money? Assets – Liabilities = Net Worth –Asset – ‘thing’ we OWN that has value –Liability – what we OWE So, your net worth is basically the money you would be left with after ‘selling’ all you ‘OWN’, and paying off every dollar that you ‘OWE’ With money left over, after paying our monthly expenses, we should try to increase our net worth

A ‘Simple’ Net Worth Example: ‘Your Car’ (only asset) is worth $5,000 You still owe (liability) $2,000 on the car Your net worth in this situation is $3,000 Equity = ownership –‘I have $3,000-worth of equity in my car’ $5,000 - $2,000 $3,000

#2 – Plan for Managing Liquidity Liquidity = how much readily available cash a person has –Assets vary in ‘level of liquidity’ Very important when dealing with immediate/unexpected expenses –Enough money in emergency fund? Money management = decisions on how much cash/ liquid assets to keep available Credit management = decisions on using credit –Credit often used to meet immediate ‘cash shortfalls’ Interest – rent on borrowed money

#3 – Plan for Your Financing Finance = to take a loan out for a ‘bigger’ purchase −Car, house, college,… −Usually w/down payment −Money is ‘financed’ to cover the remaining cost −Make sure you can afford to make ‘monthly payments’ −Payment terms = details agreed to for paying back a loan −Interest rate for loan, time to pay loan off,…

#4 – Plan for Managing Risk Risk = possibility of financial loss Protect your assets w/insurance –Reduces amount a person must pay, if assets are lost/damaged Insurance types –Car, house, health, etc.

#5 – Plan for Your Investing Investing = ‘spending’ money today, with the expectation of earning a profit in the future –Stocks, bonds, etc. –Varied levels of risk Some are “high risk, high reward” Recommended, but only w/money remaining after paying necessary bills

#6 – Plan for Your Retirement Things to consider: –Social Security… –How much to save? –How to invest it? Many retirement plan options to ‘meet’ whatever your goals are

#7 – Plan for Keeping Records and Communicating Keeping records allows for accurate understanding of evolving financial situation –Established goals, progress towards them Communication w/in family is very important