When someone travels to a place, they have to build the plan first. They should provide cash, the baggage, passport, visa, and others. We have to provide enough cash so we can buy ticket, food and cloth. We do not wan loss in a strange place and without any penny.
I believe that we should also build or create a personal financial plan. People should have a financial plan for their future. To create a personal financial plan, you can follow these steps below:
1. Compute the net worth
Net worth reflects the wealth of someone. The net worth is the excess of asset to the liabilities. It is not difficult to calculate it. First, you can list the entire asset that you have such as, cash, marketable security, house, car, property, and others. Counting the cash is not difficult. You compute the cash in your wallet and your bank account. On the other hand, you must be difficult when you should calculate the property and house price. You should compare the price to the similar assets. For marketable security, you can compute it as the market value of the security. For example, you have one thousand sheet of communication company stock that price is $20. The total net asset of security is $20,000.
Second, enlist the entire of debt such as notes, mortgage, lease, credit, and others. Place the short term at the first line of the debt. The short term is the debt that you should settle at least one year.
Third, subtract the entire of your asset with your liability. The result should be positive which means you have more asset than the liability. If the result is negative you have to improve it immediately. Next time, you should decrease your debt to improve your net worth.
2. Check the acid ratio
Compare the debt with your income. The debt supposedly must be lower than the income. The debt is not more than 30% of the income. If the debt is so higher, you have to reduce the debt soon or it will harm for you. High debt may charge you to your spending. You should allocate more money to debt. The higher acid ratio could make you bankrupt. You cannot pay the debt and you cannot fulfill your basic need such as food, cloth and house.
Reduce your debt fast as you can and do not borrow money again.
3. Analyze your cash flow
Recognize from where the cash inflow? We usually get the cash inflow from the salary. Perhaps you stream cash inflow from other sources such as business profit, royalty, goodwill, and others.
On the other hand, recognize your cash outflow? For what the money you have get? You must spend the money for food and beverages. Track the food expenses each month. There are some monthly spending such as, cloth, mortgage, credit, kid education, and others.
The Cash outflow is better lower than the cash inflow. It means you still hold some money. On the other hand, you should be careful if your cash outflow is higher than you cash inflow. You should increase the cash inflow as you can or you can reduce the cash outflow.
4. Manage risk
Life is full of dangerous but we can reduce it. Some people may buy insurance to protect their risk. They buy life insurance to protect their family and hope the family have sufficient fund when they died.
Managing a risk is not only buying insurance but also creating portfolio. Invest your money to various investment such as stock, bond, ETF, mutual fund and else. It may reduce your risk in investing. I prefer to invest my money at various investments than buying insurance. In my opinion, it is cheaper. When you buy insurance, you must pay some fee and transaction fee and the insurance company invest it a various investment.
5. How much money that you invest
This is important part of the financial plan. The investment is important for the future. It can fulfill the future expenses such as retirement, kid education, house, and others. If we have so much money, we can invest I to so much investment. More money you invest, more money you will get.
Should we invest the entire of money? Off course, we should not invest all money. We need some cash to buy something or we need it to buy our debt. We also allocate some money for emergency fund that help us when we need money.
The money that we can invest is the income residual after we allocate to monthly expenses and saving. If we got so much money from other revenue, we can invest it.
6. Assess the risk tolerance
Are you dare to invest your money at the high risk investment? Most young man dare to take the high risk because they still young and they can make money fast. When they fail in one investing they can find money. On the other hand an old man should think over many times in investing at high risk investment.
The risk tolerance will determine how much money that you will invest. People who dare to take high risk may get high return. We cannot blame someone who chooses low risk. They can invest at safe investment or low risk investment. There are some test to asses your risk tolerance and you can use it.
7. Assess asset allocation
What is the portion cash to the assets? The cash is very important but having too much cash is not profitable. You should diversify your asset to various asset either real asset or financial assets. Some experts suggest selling the investment such as stock, mutual fund, ETF, and bond. Use the money to buy real asset such as land, property, or cattle. Unlike financial assets, the real assets price is not volatile as the financial assets. You can also sell it when the price is high. Use the real asset to makes money by renting it. Not all people can buy a house so they can hire your house. People prefer to hire the money rather than buying it because the house price is so high.
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