Should you have a one page financial plan?

Even if you’re not a dollar-crazed trader or a gambler, you’re definitely thinking more about money than you might like to admit. There’s rent to pay, children to feed and all of a sudden the car needs a costly repair. And there is little left over at the end of the month to do the things that you want to do.

A financial plan tailored to your life and desires is what you need. It may sound scary or dull, but author Carl Richards can show you, as in the book The One-Page Financial Plan, that making your own personal financial plan can not only take the stress out of your life, it can also be a lot of fun. And you’ll find it easy to stick to the program and make even more improvements when you realize that a few quick changes are freeing up resources to do the things you really enjoy.

The foundation of every successful financial plan is the answer to a simple question: Why is money really important for me? Take a moment and think about this question before reading on, and write down your answer at the top of a piece of paper. You’ll need it later.

It allows you to identify what you value by asking why money is important to you, which in turn will help you create a financial plan that suits your individual needs. Remember the last time you went to the doctor, as an example. Not every patient is given the same prescription by your doctor. In order to assess a fitting procedure, they first need to question what’s wrong.

The same goes for financial plans. Knowing why you value money will aid in the examination of your financial situation. Only then can you develop a “treatment” that will work for you.

Someone who wants to save money to travel the world and someone who wants to have a secured pension will likely have financial plans that look totally different from one another. Whereas one might want to invest in an RV, the other might want to invest in a good pension fund.

Knowing why you value money also helps you assess whether the way you spend your time reflects your values. Imagine that you value money because it gives you the financial freedom to spend more time with your family.

Now imagine that you run an independent company and spend all weekend on Twitter trying to expand your personal brand by growing your followers. You spend so much time on Twitter that you disrupt your family ‘s dinner discussions to answer tweets and check your followers. Do you live honestly according to your values?

Now that you’ve decided why money matters to you, it’s time to formulate a few goals to direct your financial future. Think back 20 years: did you ever foresee that free applications such as Skype or WhatsApp will cause your phone bills to fall? Future is unforeseeable. To deal with this unpredictability, the financial strategy, and the priorities that underpin it, should be versatile enough.

The first step in the advancement of your goals is to recognize that the future can not always be predicted. You can think of financial planning as holiday planning. Even if you set targets, such as places to visit or things to do, you can leave some room for the unexpected. For starters, if there’s a storm outside, you can’t enjoy a bike ride and a picnic. Why not change your strategy, and instead visit a museum?

It’s the same with financial planning. Your goals aren’t set in stone, so be willing to alter them if you ever get off track. Let’s say that one of your goals is to pay off your $40,000 student loan in three years. Suddenly, there’s a financial crisis that leaves you unable to save as much as you planned. Instead of sticking to your previous plan, you could readjust and settle on paying off $28,000 in the same amount of time.

Once you’ve come to terms with the fact that the future is unpredictable, it’s time to start writing down some goals. But what should your goals be?

Imagine this was your response to the why question: “Money is important because it will help me give my kids the best opportunities and keep them safe.”

Some of your goals could be things like:
• In two years I want to have set aside enough money to co-finance my son’s studies
• Next year I’d like to send my daughter on a three-month foreign exchange trip
• I want to set up some emergency funds in case my kids don’t find a job right out of college
No matter what your goals are, remember: you can always adapt them as your situation changes.

Your values and goals serve as your guide no matter where you want to be financially. However, before you can actually make any decisions about where to take action, you first have to understand your current situation.

Knowing your assets and liabilities clearly will help you take the measures necessary to achieve your goals. But imagine that you don’t know your exact financial state-or do n’t want to know it. How can you possibly know what you need to do to get where you want to be without that information?

To discern your current financial situation, make a simple balance sheet. Draw a T shape on a piece of paper, putting your assets, such as your investments and savings, on the left, and on the right your liabilities, such as your mortgage and debts. Simply subtract your liabilities from your assets to figure out your net worth. Write that above the T.

Once everything has been laid out on the table, you’ll have a clear view of where you stand and can determine your first steps. For example, if you realize that you owe $5,000 in student loans, your first action might be to make a plan to pay them off.

Apart from being helpful in deciding the next steps, knowing your financial condition will ease your financial distress and encourage action to be taken. Imagine not being able to pay your mortgage, and for weeks, hesitating to contact your creditors. But once you actually call them, you will discover how much you owe and you will be able to make a rational plan for going forward.

Or you might realize that you still owe lots of money on a car you hardly ever use. Selling it could help you inch closer to freedom from debt.

Check out my related posts: How are economic or financial bubbles formed?

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Interesting reads:

https://www.goodreads.com/book/show/22571526-the-one-page-financial-plan