 |
|
 |
 |
 |
 |
 |
 |
 |
 Ideas of Where to Start Getting started can be tough because the first thing people want to do is see how much money they can make. The last thing many people want to do is examine their own money picture right now. Naturally, we will do the latter first and the former last. But the beauty of this website is that you can go learn all about stocks, bonds, mutual funds, retirement funds, and all of the reasons each may be a good investment vehicle, in short the "fun stuff" by simply going there now. At some point though, to get there, you will likely have to engage in this self-examination, and our belief is let's get it over with now. So what do we examine? All of your financial information starting with these two topics: Income and Debts/Credit issues. As a starting point you should examine and detail all of your income, from whatever source it is derived each year for the past three years. You should have a picture of your income and you can create an average annual and monthly income for the past three years. Naturally, if you have one or two income items that may "skew" any average, you ought to factor these out of the average. That may include a death benefit from your grandmother of $ 25,000 in one year, or a huge commission bonus of $ 40,000 from your company, before that management team was fired. Considering "one-time" income sources, we will call these "windfalls," in your average will not help your planning. And, if you do not plan for them, and are still meeting your goals, you might be able to put some or all of this "windfall" income away for investment. There are people who spend their regular incomes year after year, but any windfalls such as those described, are placed in full into "untouchable investment accounts." This requires some discipline, and is somewhat risky, if the "windfall" never shows up, but it is one method of financial planning. Be sure to include all other sources of income and arrive at a real average annual income. Also, make a determination if there is a trend to your income in the past three years. Is it going up each year? If so, by how much? Is it going down? If so, for what reasons? Will these trends continue? Once you have determined what your income is, you can take a look at the Budget Percentage Guidelines, to get an idea of how your income should be allocated. Part of the income picture is the asset picture. Assets are all of the things of value that you have accumulated, although we are basically referring to things that have real, or resale value, not sentimental value. This would include your house, second homes, stocks, bank savings accounts, other savings accounts, etc. You can utilize the Financial Assets Chart to make a list of these. Once completed, this will give you a picture of where you are now. This is important because in order to go anywhere, you usually have to know where you are. Regular Expenses. Thinking about just income and assets, however, is not a real picture of your financial health. One needs to consider debts and credit issues. Again, first focus on the recurring monthly expenses that are not one-time, but which are regular monthly expenses. Our Monthly Income & Expenses Chart can help you prepare a complete list of the expenses you may have. Naturally, car payments, house payments, water bills, heating, and air conditioning bills must be considered. This will tell you how much you need to live on each month, without any extra expenses. Often, this is one of the most important discoveries families will make. They really see some progress, in that their regular expenses are less than their income. So do not be discouraged yet, because planning can help you fix things you do not like, or increase the things you do like. Variable Expense: Every once in a while, expenses come up that may not have been planned for or expected. In order to help you keep track of these it might be helpful to take a look at the Variable Expense Planning Chart. If you keep these types of expenses in mind you can keep them from sneaking up on you when you do not have any funds set aside to pay for them. Debts are the opposite of assets, and a complete debt picture ought to be drawn. You should list all of your debts. However, keep in mind that it is all right to owe money. The most successful businesses in the world all have some debt picture, and using money to make money is a cornerstone principle of American finance. What is important is to not allow your debt picture to create any unnecessary stress. We are not judging it; we are simply identifying it. You can use the Financial Liabilities Chart to list these. A simple formula can help to create a debt to income ratio that can tell you about your financial health. The formula looks like this:
Banks and credit companies will typically force you to measure this ratio when you apply for a loan. Often, the ratios that are healthy vary for different reasons, but if you have a debt to income ratio approaching 30 % of your annual income you might be heading for trouble, but not always. Really, few people can identify for you how much debt is not harmful, because what is good for you might be disastrous for others. Accountants would like to see us never have any debt. Credit issues. Credit cards or bank, or other loans, can be an important part of your debt equation. It is important to know what credit you already have outstanding, so that you can determine future goals. For example, if you are going to need a college loan in two years, you may not want to obtain a bank loan now for a new Mercedes and for a new lake house. These decisions made now, even assuming you can afford it, may seriously impact your ability to obtain the critical college funding in two years.
|
