Personal Finance Basics

Set Personal Financial Goals

The very first step to budgeting, tracking and managing your personal finances is to set purposeful and realistic goals and tactics that reflect your personal aspirations and your reality. You need to do this for the short term as well as for the long term. This should include reflecting on your beliefs and values, your purpose, your capabilities, your career, your family, and even perhaps your legacy. You should think about how money plays a role as an enabler in reaching these goals in your life. Use your personal goals as a basis for defining your financial goals. Your financial goals may be things like, budget to afford post secondary education, make enough money to live comfortably, save enough to retire early, build a successful business, ensure there is enough money available to help my children with education and first home purchase, have insurance or reserves in case things don't go well, and make sure my estate is in order and optimized. Your financial goals will guide you with your decisions when making your financial plan.

Make a Financial Plan

Everyone needs to plan their personal finances. This should include short term planning as well as long term planning. Short term planning can be easily accomplished using an Annual Financial Plan that enables planning and tracking of income, expense and savings over one calendar year. It also includes doing a net worth which is a summary of your assets and liabilities at the start of the year and at the end of the year. Long term planning can be accomplished using a multi-year or Lifelong Financial Plan that enables planning and tracking of income, expense, savings, investments, assets and liabilities over many years or for life. MyFinancePlans personal financial planning spreadsheet templates are the best tools available for planning and tracking your finances. No other approach allows for ease of use, realism, accuracy and complete flexibility for your individual financial situation.

Your Sources of Income

An important aspect of personal financial planning is identifying and understanding your sources of income into the future and into retirement. In your earlier years this likely includes employment income and/or business income. In the years between retiring from work and collecting government pension this may include company pension and planned registered retirement plan withdrawals. In your senior years this may also include government pension and seniors assistance. For some there may also be inheritance.

It is important to determine when your income is expected to be the lowest and to plan to withdraw personal retirement plan amounts at that time to fill the income gap and to minimize tax. If you plan to retire before you collect government pension then the period between may be the best time to withdraw part of your personal retirement plan as income, then reduce it when government pension kicks in. That raises the question, when should I retire and when should I start collecting pension. A personal financial plan based on MyFinancePlans can allow you to do "what if" scenarios and determine how much to save, what type of investments to hold and when to withdraw it.

Managing your Expenses

Managing your expenses means understanding what you spend your money on, making decisions about what to spend your money on and maintaining a balance called "Living within your means". An budget plan or an annual financial plan will allow you to do plan, track and manage your expenses for the current year. Once you have that you can then use that to project your expenses over future years and of course make adjustments based on what you know or presume about your future. That goes into your lifelong financial plan.

But how would I expect my expenses to change as a result of life events such as getting married, having children, changing careers or retiring. That depends on the event of course and only you can make those judgements. For example, you may plan that when you retire your lifestyle and spending habits will continue as they always have. That is a good assumption and starting point. Then factor in other things such as that maybe the children have left home and the expense associated with them will reduce. Or perhaps you expect quite the opposite, you presume a possible need to support adult children at home or elsewhere.

The point is managing your expenses is not just for now, it is for life, and you need a financial plan to do that.

Planning and Tracking your Cash Flow

Cash Flow is essentially the balancing of your expenses against your available income so that your cash on hand (bank balance) always remains positive and relatively steady, while also considering transfers to or from your long term savings.

Planning and tracking your cash flow over the short term can be referred to as budgeting, for example a Monthly or Annual Budget. A good example is the MyFinancePlans Free Easy Budget Plan.

If you also plan and track your Net Worth (which includes all of your assets and liabilities) over this period including all transfers into and out of your savings as well as the growth of those savings then it is more than a budget, it is a Financial Plan. A good example is the MyFinancePlans Annual Financial Plan.

Planning and tracking your finances over a longer period of time is a long term Financial Plan. A long term financial plan may be 5 years or 10 years, or until retirement, or for the rest of your life, whatever period time is of interest. A good example of a long term financial plan is the MyFinancePlans Lifelong Financial Plan, which may be used for any number of years up to 43 years.

Each of the MyFinancePlans Personal Financial Plans editions (Basic, Lite, and Full) comes with both an Annual Financial Plan and a Lifelong Financial Plan.