A financial plan is a written strategy designed to maintain good financial condition and achieve financial targets. In addition to controlling your financial condition, you can improve your quality of life by making a personal financial plan because this will reduce uncertainty by anticipating possible financial problems and future needs. Many people develop a financial plan with the help of a professional financial consultant, but you can do it yourself by following the recommendations of financial experts who suggest a six-step process for creating an effective financial plan.
Step
Part 1 of 6: Determining Your Current Financial Condition
Step 1. List your current assets and liabilities
Assets are assets that you have with a certain value and liabilities are the amount of debt that you must pay off.
- Assets can be cash or other cash equivalents, for example: checks and savings accounts, property you own including items in your home and/or car, investments in stocks, bonds, or pension funds.
- Liabilities include bills for living expenses and debts that you must pay off, for example: car loans, home loans, medical bills, credit card debt, or education fund debt.
Step 2. Calculate your net worth
Add up all the assets and then subtract the liabilities. The result is your current net worth. This number will be listed as the beginning balance of the financial plan.
A positive net worth means that your total assets are greater than your total liabilities, while a negative net worth means the opposite
Step 3. Organize financial records
Create a storage system for tax reports, bank accounts, insurance policy information, agreements, receipts, testaments, notarial deeds, property rights, bills, investment proposals, pension funds accounts, proof of payments, salary slips, mortgage payment reports, and other related documents. with financial transactions that you do every day.
Step 4. Record daily receipts and disbursements or cash flows
This record will provide accurate information on every transaction of spending money, namely daily habits that have an impact on the current net worth balance.
Part 2 of 6: Setting Financial Targets
Step 1. Set short-term, medium-term, and long-term targets
Every financial plan must have a target. Think about what kind of lifestyle you want right now, short term, and long term and then write down comprehensive goals that cover all aspects of your life. For example:
After determining the target of buying a house by saving IDR 1,000,000/month, you realize that short-term targets can support the achievement of medium and long-term targets because within a certain time, you can buy a house that is a long-term target by saving every month
Step 2. Create a plan that meets the “SMART” criteria
SMART stands for specific, measurable, attainable, results-focused, and time-based. Plans according to these criteria help you realize the things you dream of through concrete actions.
Step 3. Reflect on the value of your financial beliefs
What is your perspective on money and why? If you think money is important, why? You will find it easier to formulate financial targets by answering these questions. For example: Money is important because you want to have a lot of time and financial freedom in order to fulfill your desire to travel abroad. Understanding yourself helps you determine and prioritize efforts to achieve the goals you have set.
Step 4. Involve all family members in the discussion
If you have a spouse or are already married, make a personal financial plan as a family plan. When gathered, each member may convey the values of their beliefs and targets. After that, make financial decisions based on these things.
- If different priorities arise, discuss calmly until both parties agree on financial targets that will be shared priorities.
- Know that there are people who are better at managing money. Determine who is responsible for monitoring the household budget or make an agreement so that you and your partner can manage finances together.
Step 5. Consider all goals, including desires that don't seem like a financial plan
For example: planning a vacation to Europe may not seem like a financial goal at first, but you need to raise funds to be able to travel.
- Targets in the intellectual aspect, for example: continuing education, attending leadership training, sending children to university, attending seminars.
- Consider ways to earn an income, for example: deciding to continue your career, increasing your competence to get a promotion, or having a career in a new field.
- Set lifestyle goals so you can have fun and achieve the quality of life you want.
- Set a target for choosing a place to live, for example: renting or buying a house.
- Visualize what your lifestyle will be like after retirement and then set financial targets so that you are able to live your retirement according to the standards you have set.
Part 3 of 6: Deciding on Other Actions
Step 1. Consider other ways to reach your financial goals
In general, the available options fall into 2 categories: utilizing existing resources in new ways or undertaking new ventures to generate income. Whichever option you choose, consider whether you want to:
- Continuing the same effort.
- Develop an ongoing business.
- Change the current state.
- Doing new business.
Step 2. Remember that certain goals can be achieved in various ways
For example: if you want to save money to travel to Europe, get rid of the habit of drinking coffee at coffee shops and prepare it yourself at home so that your savings continue to grow by IDR 100,000/week. Another way, make cookies and then offer them to neighbors or coworkers and then save the results for a vacation.
Step 3. Determine whether one target affects the other
In addition to determining other ways to achieve financial goals, you must consider the impact that certain targets have. For example: You want to vacation abroad to achieve a certain lifestyle, but once you think about it, continuing your education to learn a foreign language will allow you to travel less expensively. In addition, you can work abroad as a translator or entrepreneur.
Part 4 of 6: Evaluating Alternatives
Step 1. Decide how you will implement the financial plan
Consider your living conditions, belief values, and the current state of the economy.
- Compare your current financial condition with your desired condition (based on the categories in the step above). After spotting the differences, focus attention on certain aspects by making a financial plan to put in the necessary effort.
- Decide on a practical way. Detailed plans help you achieve your goals without feeling frustrated or overwhelmed by a less specific work agenda.
Step 2. Remember that each option will have an opportunity cost
Opportunity cost is the opportunity you have to sacrifice for making a decision. Saving for traveling abroad by giving up the habit of buying coffee costs you time, plans, and interesting conversations with your favorite coffee maker.
Step 3. Research like a scientist before making a decision
Gather as much information as possible and then evaluate the data carefully. For example: if you want to invest, study the correlation between risk and return. Consider the level of risk and how much income you will receive if the investment is successful. Is the income worth the risk?
Step 4. Realize that uncertainty is normal in everyday life
Even if you have done thorough research, the parameters in your life may change. The sluggish economic conditions tend to cause losses. The new job you've been dreaming of turns out to be both personal and professional disappointment. Make the best choice and remember that you can adjust your decision if needed.
Part 5 of 6: Preparing and Executing a Financial Plan
Step 1. Remember the ultimate goal of your financial plan
After setting goals, finding alternatives, and evaluating those alternatives, write down all the ways you want to implement them. Consider your current condition and then set the most realistic target.
- Calculate your current net worth. If your liabilities are equal to or greater than your current net worth, take steps to change the ratio.
- If you decide you want to increase your net worth, don't forget that paying off debt is the right investment. Interest costs on relatively small debts will increase over time. Prevent more serious problems by allocating funds to pay off debt.
Step 2. Determine the target you want to achieve at this time
Find a balance between short-term, medium-term, and long-term goals so you can plan for the months and years to come.
- Focus on increasing growth rates. This is a determining factor so that you are able to achieve the target.
- Be realistic. The strategies you have evaluated may not necessarily be implemented simultaneously. Therefore, choose several mutually supportive targets so that all of them are achieved and provide results that support the realization of other targets.
Step 3. Prepare a budget based on the targets in the financial plan
After knowing the amount of net worth by calculating the amount of current assets and liabilities, use this information to make a work plan according to the decisions you have made and then carry out these decisions with full responsibility. For example: if you have decided to reduce your coffee drinking budget of Rp. 80,000/month to save, record that number in your financial budget.
The decision to get a new job is usually difficult to include in the budget, but it should be recorded in the financial work plan as a reference that must be considered
Step 4. Explore the possibility of seeking advice from a financial consultant
Even if you are able to make your own financial decisions, a financial consultant is a neutral person so you can give advice without getting emotional.
Part 6 of 6: Reviewing and Revising Financial Plans
Step 1. Think of a financial plan as a worksheet
Creating a personal financial plan is a process because change can happen at any time. Sometimes, you need to adapt your plans to changing environmental conditions and set new targets.
Step 2. Evaluate the financial plan on a regular basis
If your daily life changes very quickly, for example during college, you should evaluate your plan every 6 months. If your life tends to be more stable, for example after the children are independent, do an evaluation once a year.
Step 3. Discuss a personal financial plan with your partner
If you are already committed to a relationship, you should do this planning process with your partner. When making a commitment, remember that financial discussions should be part of discussing values, goals, and plans to achieve those goals.
Tips
- Purchase a program to automate the creation and management of financial plans.
- Educate yourself. Read books, newspaper articles, magazines and financial journals on websites that focus on the state of finance and the economy. Watch news shows and discuss with people who are experienced in making personal financial plans. The more finance topics you understand, the better your plans for financial well-being will be.
- Seek advice from a professional financial consultant if you want to decide on the most appropriate way to invest.
