Step 4: Assess Your Resources
Now that you have identified your financial goals, calculated
your net worth and evaluated your income, the next step is to
assess all of your resources and begin developing your
financial plan.
Emergency Funds And Insurance
This assessment should begin with a look at your financial
foundation. That foundation helps protect you
against unexpected losses that might otherwise
keep you from meeting your goals.
A strong foundation begins with an emergency fund of easily accessible savings.
Most experts recommend this fund should equal 3 to 6
months of basic living expenses to help protect you from
unexpected bills or unemployment.
If you do not already have an
adequate emergency fund,
consider making it a priority
on your list of goals.
Keep your emergency fund in a
liquid, easily accessible account
such as a savings or money
market account.
Unfortunately, even an emergency
fund cannot prepare you
for catastrophic loss or illness.
Most individuals buy insurance
for these costly emergencies.
The most common types of
personal insurance include:
-
Auto
-
Personal property
-
Homeowners/Renters
-
Health
-
Life
-
Disability
-
Personal liability
It is important to review your current coverages at least
annually to determine if you are adequately covered. Remember
to factor in group coverage provided by your employer and
government coverages such as Medicare, Social Security
Disability Insurance and Workers' Compensation. You should
also contact your attorney regarding your estate planning
documents including a will, durable power of attorney and
health care directives.
Step 5: Save For Your Goals
Once you have established a solid
foundation of emergency fund and insurance,
you are ready to begin saving and investing for your goals.
For this next exercise, you will use the Savings Goals Work Sheet
to identify the gaps between your financial goals and your
resources. Then take a look for ways to
combine the two.
Finding The Gaps
Now look back at the savings
and investments line of your
Income And Expense Summary.
How does the
amount you are currently saving
compare to the amount you have
determined you should save
each year to reach your goals?
Some individuals
discover they are saving more
than enough to meet or exceed
their goals; but for many, the conclusion is much different.
The
Savings Goals Work Sheet
encourages you
to work on your goals today. It
assumes your pay increases and
returns on investments will only
keep pace with the rate of inflation.
Adjusting Your Plan
Here are some questions to ask yourself
if the amount you are now
saving falls short of the amount
you need to save to reach your
goals.
-
Are you paying yourself first
with a disciplined saving and investment program that puts
away at least 10 percent to 15 percent of your net income?
-
Could you increase the
amount you are saving?
-
Could you earn more and/or
spend less?
-
Are you spending too much
on impulse purchases and
neglecting long-term savings
goals?
-
Are your goals too ambitious?
-
Could you change or eliminate
any of your goals?
-
Could you delay any target
dates of your goals?
With these questions in mind,
take another look at your
Savings Goals Work Sheet and at your
Income And Expense Summary.
Make adjustments in both until your actual savings
is equal to your goal savings.
When you are finished with
your adjustments, you should
have a savings plan for this year
and a forecast for your future.
Remember to repeat this
exercise annually. If your income increases, you receive
interest and dividends, unexpected bonuses or find other ways
to accelerate your savings, then you will accelerate your
progress toward your goals. Be prepared to modify your goals
if you suffer a setback.
The key is to remain flexible.
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Basic Money Management
Basic Money Management
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