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The Tax Professionals

Developing a Financial Plan

Some guides to help you develop a sound financial plan for today and the future, no matter where you are in your life's journey.

Table of Contents

Your Financial Plan: Getting Started On a Secure Future

This Financial Guide tells you how to begin the financial planning process. It provides worksheets to help you find out where you are financially and where you want to be in the future. It will help you identify your goals, determine your net worth and cash flow, plan to achieve your goals as well as begin to put your plan into action.

Financial security derives not only from acquiring more money, but from planning. A solid financial plan can alleviate financial worries about the future and ensure that you will meet your financial goals-whether they relate to retirement, asset acquisition, education, or just vacations.

Tip: Review your financial plan every year to keep it up to date. If you set it up properly initially, it is relatively easy to review and keep current.

This Financial Guide allows you to take the first step towards a solid plan. By following the instructions and guidelines contained in it, you can find out where you are now and how you can put your plan into action.

There are many ways to approach setting up a financial plan. The one outlined in this guide is just one of a number of approaches. Your financial advisor can assist you in setting up the financial plan that best meets your particular situation and needs.

Identify Your Goals

Spend some time thinking and talking with family members about what you would like to achieve financially. What would make you and them happy? What would be fulfilling? Would you like to start your own business? Retire early? Acquire a vacation home? Pursue a hobby? Travel?

Perhaps you'd like to change careers, and you'll need money to finance an education in a different field. Or perhaps you'd like to have a large amount of money to give to your favorite charity. Once you've got some idea of what you'd like to accomplish, fill out the Goals Worksheet below...

  • The "Goals" section should state what you'd like to accomplish. Be as specific as possible, e.g., instead of writing "Acquire a bigger home," write "Acquire a home with at least 12 rooms in Anytown."

  • The "Amount" needed should be an estimate of the amount of money you'll need. For instance, to retire early, you might estimate that you'll need a $400,000 nest egg by the time you reach age 50, or to buy a vacation home, you might estimate that you'll need a $50,000 down payment.

  • The "Target Date" section should include the approximate year-or, in the case of short-term goals such as a vacation in the current year, the month-in which you would like to achieve your goal.
GoalsAmount NeededTarget Date

Determine Your Net Worth

Your financial plan should include an inventory of the existing financial resources you'll be using to achieve the goals you decided on above.

Fill out the personal statement of net worth below. This will enable you to estimate the value of everything you own, minus the value of your debts. When asked for a value, use what the property would fetch if you sold it today-its market value.

It may take some time to do this, but the effort will be worth it. This is the foundation for your financial plan.



Checking accounts$$$
Savings accounts$$$
Brokerage accounts$$$
Money market accounts$$$
Certificates of deposit$$$
IRA accounts$$$
Keogh accounts$$$
401(k) plans$$$
Pension plans$$$
Other retirement accounts$$$
Life insurance (cash values)$$$
Bonds (government)$$$
Bonds (corporate)$$$
Mutual funds$$$
Other securities$$$
Money owed to you$$$
Other real estate$$$
Household furnishings$$$
Other assets$$$

Total Assets
Home mortgage
Other mortgages
Automobile loans
Credit card balances
Installment accounts
Contractual obligations
Money owed to others
Income taxes
Other debts

Total Liabilities
Total Assets (from above)$$$
Less Liabilities (from above)$$$
Net Worth (Assets less Liabilities)$$$

This statement should be reviewed to determine which assets are available to achieve the goals you listed above. If most of your net worth is tied up in your home and personal use assets (such as furniture and cars), you may not be able to achieve your goals. Which assets are available to invest towards your goals? Are they sufficient? If not, you may need to liquidate other assets or start a savings plan out of your cash flow to come up with the necessary funds.

Determine Your Cash Flow

Once you've completed the net worth statement, fill in the cash flow statement below. This will give you an estimate of what you earn per year-your salary, investment income, and retirement income-and what your current expenses are. To fill out this form, it will help to have on hand your check register and one year's worth of credit card receipts.

Here's why the cash flow statement is so important: Once you know how much is coming in and how much of it is going out in the form of expenses, you can start to make adjustments in your discretionary expenses in order to meet your saving and investment goals.


Period: to

Social Security
Retirement Plans
Reimbursements (only if included as an expense)
Sale of investments
Other income

Total Income
Savings (including pension plan contributions)
Income taxes
Property taxes
Insurance (health, disability, life, car, home)
Other debt payments
Utilities (heat, electric, water, garbage, phone)
Medical (other than insurance)
Personal (small cash expenditures, such as haircuts)
Charitable contributions
Holiday expenses
Other (children, professional fees, hobbies, etc. -- if large expenditures, create a line item for each)

Total Expenses

Note: Omit one-time, non-recurring items as they should not be used for budgeting or future planning.

How much cash flow is available to accumulate assets for the goals identified above? Is it sufficient in combination with your available assets from your net worth statement? If not, you need to examine the above expenses in detail and cut back on those which are discretionary until sufficient cash flow is identified.

Plan To Achieve Your Goals

Now that you know what your goals are and have an idea of your financial resources, it's time to begin making a plan.

Financial Safety Net

Determine the funds you'll need in case of a disaster or emergency. Coverage of such contingencies comes from insurance and from an emergency fund.

Emergency Fund

You should have a fund of three to six months-we'll leave the number of months to your judgment--worth of living expenses to tide you over in case you lose your job or have unexpected bills. The emergency fund should be kept in an accessible account: a money market account is good for this purpose.

Life Insurance

Make sure your coverage is adequate. You should have enough coverage, should a catastrophe occur, to ensure your family would continue to enjoy the same level of income it does currently.

Disability Insurance

Disability insurance is intended to replace lost income due to the occurrence of illness or accident. Consider whether you need to provide coverage for your family.

Related Guide: Please see the Financial Guides: DISABILITY INSURANCE: What To Look For and DISABILITY BENEFITS: How To Get All You're Entitled To

Auto, Home, and Health Insurance

It's important to make sure these types of policies provide adequate coverage. If not, an accident or other catastrophe could wipe out a large portion of your assets or cash flow and you may be unable to achieve your goals.

Related Guide: Please see the Financial Guide: HOMEOWNERS' INSURANCE: How To Get The Best Coverage and Value

Establish How Much You'll Need

Once you have covered your insurance and emergency-fund needs, you can start working towards your financial goals.

Go back to your Goals Worksheet (above) and enter the goal in the Worksheet below. For each goal, estimate the "Cost of the Goal," i.e., the cost of achieving that goal. For instance, if you want to retire at age 55, estimate the nest egg you'll need to accumulate by then. (Don't bother accounting for inflation right now; this is just an estimate.)

Then fill in the "Amount On Hand," i.e., the amount you have already saved for that purpose. For instance, if you have $10,000 in a mutual fund IRA, you might wish to allocate that amount to your retirement nest egg.

Next, write in the "Amount Still Needed." Then, fill in the "Years to Target Date", i.e., the year you want to achieve your goal. Finally, enter the "Intended Yearly Savings," the amount you need to save each year (the "Amount Still Needed" divided by the "Years to Target Date").

GoalCost of the goalAmount on handAmount still neededYears to target dateIntended yearly savings

Add up the "Intended Yearly Savings," i.e., the yearly amounts you need to save, in the extreme right-hand column. Look back at the "Savings" amount in the expense portion of your cash flow statement (above). How much are you currently saving? How does this compare with how much you need to save to meet your goals?

Most people find that the amount they are saving is inadequate.

Tip: Here are some ways that you might increase the amount you are saving each year:

  • Pay yourself first. Save and invest at least 10% of your after tax income.

  • If possible, earn more or spend less. Put a stop to discretionary spending.

You might also want to take another look at your goals. Perhaps they need to be modified or the target dates need to be deferred.

Put the Plan into Action

Make a savings plan. How will you save the amounts you have targeted? Will you have them deducted from your paycheck? Will you deposit them into a savings account each month?

Once you've accumulated a chunk of savings for each goal, you'll need an investment strategy. For each goal, determine how much risk you are willing to take with your savings. This will depend on how much of the money you can afford to lose, how essential the goal is, and your own risk preferences.

You may have read recently about asset allocation, and wondered whether an investor such as yourself needed to worry about this concept. The answer is a resounding yes. Asset allocation--not fund or security selection, not market timing--is the most important factor in determining how much money you make on your investments. In fact, according to Nobel-Prize-winning research, asset allocation-the type or class of security owned--determines 90% of the return. The remaining 10% of the return is determined by which particular stock, bond, or mutual fund you select, and when you decide to buy it. In short, asset allocation and diversification are the cornerstones of good investing.

Related Guide: For a comprehensive discussion of asset allocation, please see the Financial Guide: ASSET ALLOCATION: How To Diversify for Maximum Return.

Here, in a nutshell, are the three most important things an investor can do:

  1. Establish a financial profile. Your financial profile is the translation of your goals, risk threshold, and time horizon into a graph or curve, using a computer software program. The three factors we just mentioned are plotted on a graph according to the program's formulas.

  2. Find the right mix of "asset classes" for your portfolio. The right mix of asset classes will balance each other in a way that will give the most possible return for the amount of risk you are willing to take. Using computer programs, asset allocation professionals will determine the proper mix of assets for your financial profile. Over time, the ideal allocation for you will not remain the same; it will change as your situation changes, or in response to changes in market conditions.

  3. Choose investments from each class, based on performance and costs.

How Does Asset Allocation Work?

Using computerized formulas, asset allocator's take down information they glean from a questionnaire you have filled out. This information gives them what they need to become familiar with your needs, constraints, and unique circumstances. The following factors should become apparent from the questionnaire.

  • Your risk threshold (how much of your capital you are willing to lose during a given time frame),

  • Your goals (whatever financial planning goals you and your family want to achieve), and

  • Your investing time horizon (mainly, your age and retirement objectives).

In addition, the professional needs to consider how wealthy you are, what your income tax bracket is, how much of your portfolio needs to be kept liquid, and how often withdrawals will be made from the portfolio.

The allocator's goal now is to come up with the right blend of six or seven asset classes, in the right percentages, that will match your financial profile--your risk profile and time horizon.

Budgeting: How To Prepare a Workable Plan

A budget is an essential component of your financial plan. Not only does it force you to monitor your spending, it enables you to focus on which items (such as loans and credit card debt) you can pay off or pay down so that you can accumulate funds for retirement, education, or buying a home.

Here is a guide to effectively organizing and keeping a check on your expenses.

While this Financial Guide offers you guidance on how to develop a budget that works for you and your family, don't hesitate to contact your financial advisor if you need additional assistance.

Note: The budget guidelines suggested here are intended for people who need to rein in their spending or have no idea what they spend their money on every month. If you have a good grasp of your cash inflows and outflows and have your spending under control, there may be no need to prepare a budget plan.

Related Financial Guide: Please see the Financial Guide: YOUR FINANCIAL PLAN: Getting Started On A Secure Future.

Note: Personal-finance computer software programs such as Quicken make it easy to set up a budget. If you have such a program, then simply follow the guidelines that the software gives you and use the information contained here as a guideline.

Step 1: Analyze Your Income and Expenses

The first thing you need to do is to review your income and spending for the past year. This "cash-flow analysis" will lay the groundwork for the budget you create. You'll need your checkbook, your credit card statements (paper copies or online records), and your most recent tax return. This should give you sufficient data to analyze your spending and income for the past year.

Your Income

Using an excel spreadsheet, ledger paper, or even notebook paper (as long as it has lines), list your income for a one-year period, breaking it down by month and year. Include the following types of income:

  • Salary/wages
  • Income from self-employment
  • Retirement pay and/or government-source income (e.g., Social Security, disability, unemployment, annuity, and pension payments)
  • Interest and dividends
  • Alimony and/or child support
  • Rents and/or royalties
  • Income from trusts

Your income analysis might look something like this:

Income ItemMonthlyYearly
Salary (Gross)$10,000$120,000

Your Fixed Expenses

Add up your fixed expenses. These are expenses that generally do not vary from month to month. Again, break them down into month and year. Make sure you include the following categories, whether or not they're immediately evident from the past year's bills:

  • Taxes (federal, state and local)
  • Mortgage or rent
  • Insurance, including medical, auto, homeowners, life, and other
  • Utilities
  • Automobiles (costs of operating minus insurance cost)
  • Dues and fees paid to associations and clubs

Where the amounts vary by month, as with a phone bill, add up what you paid for the year and divide by twelve to get the monthly amount. For bills that you pay yearly or quarterly, add the total amount paid for the year and divide by 12 to arrive at a monthly amount. This will help you to arrive at a more functional budget. If you have large credit card debt, indicate the amounts you actually paid, not the minimum monthly payments.

Your Variable Expenses

Next, add up your variable expenses for the previous one-year period using your checkbook and credit card statements. Be sure to include the following:

  • Food
  • Clothing
  • Furniture and appliances
  • Entertainment
  • Gas, oil, and commuting costs
  • Medical care
  • Gifts
  • Vacations
  • Fees paid to accountants, lawyers, and other professionals

Estimate if you need to do so. Here's what your variable expenses might look like:

Gifts For Weddings, Birthdays, etc. $50$600
Magazine Subscriptions $10$120
Movies, Theatre, Restaurants$175$2,100
Gas, Oil, Car Repair$400$4,800

You'll be able to tell whether you're overlooking any variable expenses by subtracting the total yearly amount you arrive at for variable and fixed expenses from your yearly income figure. If this amount is the amount you put away in savings for the previous year, then you can be pretty certain that you've included all of your variable expenses. If there is a large gap between income minus expenses and the amount you saved, do some digging to try to find out where the extra money went.

Step 2: Set Budgeting Goals

Your budget should tie in with your financial planning goals. For instance, you may have taken a closer look at your retirement plan and decided that you needed to save $20,000 per year for the next ten years to accumulate the nest egg you want for retirement.

Related Guide: Please see the Financial Guide: YOUR RETIREMENT PLAN: How To Get Started.

Or, you may be saving for a new home and figured out that you need to save $5,000 per year for the next three years to come up with a down payment.

You may also want to reduce credit card debt or pay down a mortgage with your increased savings.

Related Guide: Please see the Financial Guide: SAVING MONEY: 10 Major Ways To Increase Your Nest Egg.

When setting your budgeting goals, decide how much you want to put away each year and what you will do with the savings. Your saving goals will depend on the financial planning goals mentioned above as well as on your age and income level.

If you want to save more than you have been saving, then you'll need to cut down on optional expenditures. To do this, you'll enter an amount under "budgeted amount" that is less than "last year's actual."

Tip: Review your budget each year to make sure it fits in with your financial goals, both long-term and short-term.

Step 3: Create Your Budget

Now it's time to actually create a budget. The easiest way to do this is to use an excel spreadsheet. If you're not computer proficient, then use ledger paper or 8-1/2 by 11" paper used in "landscape" format (used horizontally instead of vertically).

Note: As we stated before, if you have a computer software program that formulates a budget for you, use that, as it will be more convenient than writing up a budget by hand. But read through our guidelines anyway to get a grasp of the concepts involved.

Each sheet of paper should be headed by the name of the month. Once you've come up with January's version, you can photocopy that 11 times, since each month's version will be the same. You will end up with one sheet of paper for each month of the year.

Each month's budget sheet might have five columns:

  • Column 1, labeled "Expense," will contain each of the items you listed under fixed and variable expenses.
  • Column 2, labeled "Last Year's Actual," will contain the monthly amounts you came up with for each fixed and variable expense.
  • Column 3, labeled "This Year's Budgeted," is where you will write in what you will allow yourself to spend on that item for the month. (It can, and probably will, differ from last year's actual expense).
  • Column 4, labeled "This Year's Actual," is where you will write in what you spend on that item for the month.
  • Column 5, labeled "Increase/Decrease," is where you will write in how much more--or less--you spent during that month than you had budgeted.

Here is a partial view (showing just two expenses) of what your monthly budget might look like:

ExpenseLast Year's ActualThis Year's BudgetedThis Year's ActualOver/(Under) Budget
Electric$780$825$800 ($25)

Arrange the items in whatever way is convenient for you, but make your budget easy to use because this will help ensure that you use it. If you prefer to categorize your expenses in an orderly way (fixed vs. variable or optional vs. mandatory), then do so. If you prefer to categorize them in the order in which they come up during the month, or by the manner in which they are paid (cash, check, or credit card), then do it that way.

It takes discipline to record each amount in your budget as you pay it, but the discipline will pay off at the end of the year when you will have a clear picture of your spending.

Tip: Keep receipts for cash payments until you are able to record expenditures in your budget.

Tip: Don't try to track every penny; instead, maintain a category called "petty cash" or "miscellaneous expenses" to cover spending cash that does not go for categorized items. This will cover cash that you withdraw from your checking account, but do not keep track of. Allow yourself a reasonable budgeted amount for this category.

At the end of each month, and then at the end of the year, look at your monthly totals to see whether you've under- or overspent your budgeted amounts. Performing a monthly and yearly review will help you to set or revise goals for next year.

Step 4: Review Your Adherence to the Budget

At the end of each month and again at the end of the year, look at your monthly totals to see whether you've under or overspent your budgeted amounts. Performing a monthly and yearly review will help you to set or revise goals for next year.

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