Personal Financial Planning

In order to make the best use of the financial resources you have, you should prepare a financial plan to which you should stick in order not to waste your money on unnecessary things and deprive yourself of resources when you really need them.

The first thing you should do is to prepare an estimation of your net worth and fill the appropriate statement. Then, compute the amount of your debt-to-income ratio. On the basis of the latter and the net worth statement, set your cash flow analysis.

The cash flow analysis represents your budget (also known as spending plan), which provides information on your monthly sources of income and their amounts and the corresponding expenses which you incur. Next, from your income you should subtract your monthly expenses in order to see what your net cash flow is.

If the value of your net cash flow is a positive number, you should prepare a plan on how you are going to manage the excess cash you have. On the other hand, if the value is a negative number, you should decide on how to cut your expenses in order to recover the imbalance. If the value of the net cash flow is break even, you should start to think of ways of increasing the flow of income in order to obtain some extra cash.

In order to determine your current financial position you should identify ways to manage the risk levels you face. You should think of protecting yourself through health or long-term disability insurances, homeowners insurance or business insurance.

You should also verify whether you are experiencing the lowest available interest rates as regards to your debts. If you have any mortgages, car loans or credit cards, you should check whether you are not in a disadvantageous position by paying more than other alternatives offer.

An important component of financial planning is your risk tolerance. You should identify for yourself how much risk averse you are in order to determine your future course of action.

An additional component of financial planning is your current investment holdings. In order to determine whether the currently held assets (mutual funds, stocks, bonds and etc.) are suitable for your future financial plans you should do an asset allocation analysis. You should also check whether you have diversified enough to reduce the levels of risk to which you are exposed.

By checking all these issues carefully, you will be able to successfully determine your current financial position and make reasonable plans for the future course of action you want to pursue as regards investing and saving.

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