At the end of every semester, I often reflect on each class' most important topics and how I can apply them in the future. I learned a great deal about personal finance in my personal financial planning course. It was an excellent class full of practical information and I am much better for taking it. But if I had to narrow it down, the biggest lesson learned was this:
The Financial Planning Process
When properly applied to your personal financial situation, this process will help you make better decisions in the future. It will make your goals attainable, whether they be paying off your debt to funding your dream retirement. It will ultimately change the way you think about your financial future by giving you a framework in which to work.
So what is the financial planning process? According to "Personal Finance, Skills For Life" by Vickie Bajtelsmit, this process is composed of five steps:
STEP #1 – Analyze Your Current Finances
Without knowing where you stand, you'll never know what direction you should take. At a minimum, you should take stock of the following:
- All Debts
- All Assets
- Net Worth
- All Saving, Checking, and any other Bank Accounts
- Investments Accounts
- Insurance Documents
- A Budget (know where each dollar came from and where it is going)
Luckily, there is help for the organized and unorganized alike. Check out my post on some of the websites that offer free "financial simplification" services.
STEP #2 – Develop Short-Term and Long-Term Financial Goals
Once you know where you stand, you will have a better basis on which to set your goals. You should think about where you want to be 5, 10, and even 40 years from now. Do your goals consist of monetary achievements or personal satisfaction? Are you concerned about your net worth or something more altruistic? It doesn't really matter what your goals are, as long as they are your goals and inspire you to achieve something more than you might have previously thought possible.
STEP #3 - Identify and Evaluate Alternative Strategies for Achieving Your Goals
Depending on your goals, countless strategies will exist to help you achieve them. All strategies will have costs and benefits that you will need to carefully evaluate. The subject matter of this blog will provide you with information regarding such strategies.
STEP #4 – Implement a Plan For Achieving Your Goals
When you have successfully analyzed all of your possible strategies, you will be able to implement a plan by selecting those most conducive to your financial situation and personal preferences. This blog will also provide you with useful tools and examples to help you make these decisions. For example, I recently posted about how much house we can afford and how we arrived at that number.
STEP #5 – Regularly Reevaluate and Revise Your Plan as Necessary
Your situation, goals, and strategies will not be the same at age 20 and age 45. Things will change over time and so should your financial plan. So with that in mind, it's simple. All you have to do is review your plan on a periodic basis and continue through the steps when necessary.
