What is a Financial Plan- Part 1
April 25, 2013 § 1 Comment
A financial plan covers your entire financial picture: your assets and liabilities, your risk management, your financial goals and whether or not they are realistic. Financial advisors offer plans and because they are so extensive, there is a cost to have one developed for you. Here are some of the parts that comprise a good financial plan. Too much info for one blog post, we’ll finish with more information in Part 2 next week.
Net-worth– a net-worth statement shows the difference between your assets and liabilities. Listing your assets means compiling the estimated – but accurate- value of house, camp, cars, business. And then adding in your ‘liquid assets’ CD’s, investment accounts whether retirement or individual/joint accounts held , savings and jewelry, coins and other hard assets.
From that total amount subtract your total liabilities: loans on real estate and other property, all consumer debt such as credit cards, student loans
The NET result, hopefully positive, is your net-worth.
Debt-to-Income ratio– This is a simple calculation. Add up all your monthly debt payments: mortgage, consumer debt, child support, everything you need to pay each month. THEN add up your monthly income. Divide your income by your debt. Here’s an example: You pay $500 a month and you earn $2000 per month your debt to income ratio is 25%
Cashflow/Budget – Cash comes in and then it is allocated for various purposes: housing, debt repayment, savings, life. Tracking the saving and spending of money is a cashflow statement or a budget. You need one to create a financial plan. You need one if you ever hope to have a positive net-worth.
Next week we will talk about the other aspects of a good plan. (CR 9154)