Let me help you in setting your financial goals…

In last two blog posting, you found your net worth and net cash flow. Net worth lets you know about financial position and net cash flow lets you know about your ability to save. From net worth, you can deduce if you have achieved enough financially and net cash flow will size you up for your ability to reach your financial goals if need be. If you are reading this blog, then i assume that you need help in financial matters.

In this posting, we would look into topic of setting your financial goals.

Primary goal of personal finance is to be able to take care of expected and unexpected financial contingencies in your future.

What are the financial goals that you need to take care of? Some of them are pretty obvious and are expected while there would be some others which you need to think through.

For a young person in his twenties and just beginning his career, goals would be as follows.

Expected ones

• Self marriage expense
• Primary home expense
• Education expense plan for kids
• Marriage expense for kids
• Retirement plan expense

Others

• Secondary home expense
• Vehicle loan expense
• Expense for starting a business
• Expense for home improvement

You might be able to come up with few more of your own.

Following are the factors that would impact your financial goal expense plan.

1. Your expected retirement age.
2. Your expected income growth rate.
3. Expected taxation rate.
4. Expected investment rates which you hope to achieve.
5. Expected rate of inflation that would diminish value of your money.

List out the financial goal sheet as follows. Against each goal, designate a number from 1-5 , 1 being set for most important goal and also set the timeframe when the goal has to be achieved. For example, your kids education expense for college might be 10 years from now and since it is important, you rate it at number 1. Make an exhaustive chart so that you can visualize the timeframe vs expense due data. This would make your life easier from planning perspective.

Categorize each goal into three buckets of short term, medium term and long term. Short term would be anything that falls in next 5 years, medium would be between 5-10 years and anything beyond that would be long term ones. You may vary the terms depending on your requirements.

Next, for each bucket, determine the steps or action items you would take to meet the goal. To name a few…

• Deferring expense for activity which are not of high priority.
• Plan for curtailing expenses
• Specific investment plan for each goal
• Reducing the recurring expenses

A tip: If you feel that you are not capable enough to complete this, then you may seek help of a financial planner.

Your Cash flows

I hope your net worth which we defined in last blog was positive.

In this posting, we would analyze your cash flow. Cash flows looks at your sources of income and expenses. This would let you know about your ability to save money for your investments and describe your standard of living. You would also be able to check if you are living within your means and if not, it would highlight your problem areas so that you can take appropriate action based on this information. All these affect your ability to do financial planning.

I suggest you collect the values for the list for a extended time period like three to six month and then average it out to find the actual value for a months time period. This would help in taking care of the variations. Extrapolate the value to get the yearly amount.

The categories in income section are

1. Salary
2. Bonus
3. Secondary income, if any
4. Dividends
5. Capital gains
6. Interests on your deposits
7. Other incomes like rents
8. Miscellaneous incomes

The categories in expense section are

1. Home rent
2. Utility payments
3. Maintenance
• Home
• Vehicle
4. Taxes
• Income
• Property
• Employment
5. Loan payment
• Home loan
• Car loan
• Credit card loan
• Personal
• Study loan
6. Commuting expense
7. Insurance premiums
• Life
• Health
• Vehicle
• Home
• Other
8. Food and clothing
9. Child care
10. Medical expense
11. Education
12. Investments
13. Gifts / Charity contributions
14. Personal items
15. Entertainment
16. Other miscellaneous

Add up the Incomes and expense account amounts. Subtract the total expense amount from the total income amount to find your net cash inflow or outflow.

Word of caution: Don’t guess too low a value and be complete in your list to get as near to the exact value.

Hey! i am keeping my fingers crossed for you.

A financial tip in humor

Calculate your net worth…

In last weeks posting, i had mentioned that there are two key aspects to look for, before venturing out. First, among those, was calculating your current net worth. Lets look into the details of the same.

Net worth is what’s left after subtracting your current liabilities from your assets.

Following categories fall under Assets

1. Cash equivalents
• Amount in your bank accounts (including checking, saving & money market)
• Fixed deposits
• Investments in certificates like NSC, KVP etc.
• Cash value of your life insurance
2. Investments
• Stocks
• Bonds
• Mutual funds
• Other investments
3. Retirement funds
• Provident fund
• Super annuation
• Gratuity
• PPF and other retirement funds
4. Personal assets
• Primary residence value
• Other residences
• Antiques / collectibles
• Vehicles
• Home furnishings
• Jewelry
• Others assets

Add all the above to derive your total assets.

Following categories fall under liabilities

1. Loans
• Home loan
• Personal loan
• Student loan
• Auto loan
• Investment loans
• Loan against your PFs
• Any other loans
2. Projected income tax liability
3. Child support cost
4. Other liabilities

Add all the above liability amounts to derive your total liability amount.

A word of caution: Be truthful to yourself when documenting the amount. By assessing your true net worth, you can figure out where you stand and can take control of the situation.

For some of the list items like residence value, you can assume the current value by finding out the real estate value in your area.

Your net worth = Total asset value minus the total liability amount.

If this value is positive or equal, then you are in good state of affairs. If you are in red, then i suggest you take up the financial matters in your hand as quickly as possible.

In next blog posting, we would look into the cash flow aspect of your financial standing.

At the beginning

Before you venture out to deciding your financial goals, its important to understand your current financial condition. There two key aspects of current financial condition you need to measure.

1. Your current net worth:- This would describe your current financial standing in as is condition taking into consideration your assets and liabilities.
2. Your cash flow:- This would indicate your ability to save, describe your standard of living, indicate if you are living with your means and consequentially highlight problem areas, if any.

In Subsequent blog postings, we would look into each one in detail.