2022 AFBA Financial Planning Guide

b. Mortgage or rent payments, car payments, utility bills. c. Installment payments for various loans, credit cards, and insurance premiums. d. An allowance for monthly food bills, clothing requirements, doctor bills, and recurring household expenses. e. Taxes — if you are self–employed, include the direct payments to the IRS. f. All other regular expense items that occur each month and over which you exercise little control. Variable Items of Expense a. Personal allowances for family members. b. Recreational and vacation activities. c. Household expenses and repairs. d. Other expenses over which you may exercise control including gifts and charitable contributions. When making this record, leave a few blank spaces after each major category for items you might have overlooked. They can be added later as you remember them. When the list is complete, you will have a starting point for your initial financial decisions. If your income is more than your expenses, you are in a very fortunate position. You can take immediate steps to build your estate by increasing monthly savings, buying additional insurance, and similar actions. However, if your expenses exceed your income, you will need to take action to either reduce your expenses or increase your income. Some initiatives that you can take to bring your budget into line include: (a) a loan consolidation plan to reduce monthly loan payments; (b) a part-time job; (c) reduction or elimination of vacations, restaurants, and other variable expenses; (d) bargain price purchasing — but be careful to avoid buying an item because the price has been reduced 10% and then carrying the balance on an 18% credit card! STEP NUMBER 5 — FINANCIAL GOALS Now that you realize you have an estate (your balance sheet) and you know how much you can spend to build that estate (your budget), it is time to set a few realistic goals. You are

not the only one who wants to be rich and successful, but you are the only one who can do it. It takes time, planning, and setting goals to pace yourself along the way. When setting goals, make sure they are realistic and quantifiable. You need specific milestones — ones that you can reach such as having $1,000 of savings in two years, $2,000 in three years, etc. Reaching a milestone you have planned and worked toward is one of the most rewarding experiences you will have. It is very important to put your goals, as well as your projected milestones in writing . You will realize the value of this function when you reach that first goal and proudly say to yourself, “I knew I could do it!” STEP NUMBER 6 — ACTION PLAN Establish a simple plan to achieve your goals. You might consider a sequence of actions, such as: First — Develop an adequate life insurance program for you and your family. A sound program will not cost a fortune and can avoid severe family hardships if you die before reaching your financial goals. Second — Build an emergency savings account having a balance of at least three months’ pay, and use it only for true emergencies. Third — Establish a solvent financial situation where day–to– day financial needs can be taken care of without creating a financial crisis or stress on your budget. Fourth — Develop a sound and continuing program of savings and investments. STEP NUMBER 7 — IMPLEMENTATION It is now time to put your plan into action. This process will give you confidence in your ability to control your personal affairs and will help insure the future security of both you and your family. 8–3. FINANCIAL RATIOS. The success of your financial plan is ultimately determined by the achievement of your financial goals. If your goal is to save $5,000 and you achieve that goal, then clearly your have been successful. In addition to this evaluation, there are several objective criterion that

CHAPTER 8: PRINCIPLES OF FINANCIAL PLANNING

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