Financial Position

Financial Position - Building Your Current Plan

Evaluating your FINANCIAL POSITION is usually the starting point in a financial plan. It reflects where you are today in terms of Net Worth and Cash Flow. By developing assumptions about growth rate and income distributions about your assets and assumptions about future income and expenses, upon developing your financial statements, you should have a pretty good idea if you can achieve your financial goals.

Begin by building your Balance Sheet or Statement of Net Worth. In this statement, you will include all of your assets. Assets are things you own such as bank and investment accounts, life insurance policies with cash value, your home, business interests and personal property such as cars, boats, jewelry, art and so forth. Another section of your Balance Sheet lists all of your Liabilities. Liabilities are debts that you owe such as mortgages, student loans, credit card debt and the like. When the liabilities are subtracted from your Assets, what remains is your NET WORTH.

Budget Statement
The next statement you need to complete is a budget statement. This is usually a difficult part of the data gathering process. If you are a net worth individual with plenty of excess income, you can usually get by with general assumptions such as stating that you spend $10,000 a month. For most people though, engaging in the exercise of building the budget can be a revealing event. Many of us don’t realize where our money is going and how much is being spent indiscriminantly. Many people cannot identify where 10%, 20% and sometimes 30% of their money is going! Often, making changes in your budget results in the success or failure of achieving your goals.

Income Statement
You might also wish to develop an Income Statement if you have a number of income sources. You will need to be aware of your future income streams in retirement such as social security, pension payments, deferred comp and other revenues.

Projections
With all of this information and your list of assumptions, you can then build Net Worth and Cash Flow Projections running out to whatever age you expect to live. While life expectancy tables differ, consider your family’s longevity when determining your planning end point. If all of your relatives are living into their 90s, you don’t want to plan to age 85.