"He who knows not where he's going, all roads will lead."

WHERE ARE WE NOW?
Where we are now can be summarized financially with the Balance Sheet or Statement of Net Worth. The balance sheet lists your assets and your liabilities. Hopefully, the assets exceed the liabilities and this excess is your net worth. All assets and liabilities should be valued at the current market value instead of any cost basis. For example, if you bought a stock for $1,000 and it is worth $5,000 now, your balance sheet should reflect $5,000. Don't forget the cost though because you will need to know that information should you sell the stock and pay taxes on the gain.

Click here for an example of a balance sheet.

HOW ARE WE DOING?
Unlike the Federal Government, we as individuals need to be able to live within our means. The next statement attempts to determine our sources of income and expense. We will call this "Cash Flow Statement". Doesn't that sound a lot better than "Budget". This is always an interesting exercise because people realize how much they more they spent than they thought. You want to identify your sources of income such as salary, dividends, interest, self employment earnings, etc. Your tax return from the prior year is a good source of information.

You then want to identify sources of expense. Right off the bat are taxes. The Cash Flow Statement you will see shows income taxes in the income section as a reduction. We like to show income taxes in this manner because we can get a determination of the net take home pay available. If you want to show income taxes as an expense in the outflows section, that is okay.

Next, you list all your other expenses. The amount of detail you show is up to you. Too much detail can make it difficult to interpret information. The expenses we show are those that come into play in later sections. We group all others as living expenses.

Finally, the Cash Flow Statement you will see has multiple columns showing the Cash Flow Statement under different scenarios. These are death, disability and retirement. We are attempting to identify the needs for each of these situations and this information will be needed under each appropriate section.

So, click here to see what we are talking about.

WHERE ARE WE GOING?
In the balance sheet section we determined where we are. In the cash flow section, we found out how we are doing. Now we define where we are going. In other words, "What I want to be when I grow up". This is the most important part of the financial planning process. All decisions should be based on the objectives. However, the hard part is defining the objectives. A major objective is always to plan for retirement. Saying "I want to retire comfortably" is not acceptable. Saying " I want to retire with the ability to spend $50,000 annually adjusted for inflation" is an example of a clear and definable objective. What we will list here are typical objectives that hopefully will provide you with an idea of how to define your own individual goals.

"TYPICAL" GOALS AND OBJECTIVES

• To retire at age 55 with an annual income of $50,000 in terms of today's dollars.
• To completely pay off the mortgage on my personal residence by the time I retire.
• To establish a funding plan to pay for the education needs of my three year old at a four year college at an annual cost of $25,000 per year.
• To provide enough life insurance to allow my family to spend $50,000 annually adjusted for inflation.

OTHER GOALS AND OBJECTIVES
To accumulate enough funds for a 20% down payment on a $200,000 house in five years. To accumulate funds to pay for a $20,000 car to give to my parents on their golden anniversary in two years. As you read the goals listed above, you see that the goals are clear and determinable. There are time frames, amounts and ages. This is critical when defining your own goals. The financial planning process is merely an exercise of allocation of resources. Everyone has limited resources and achieving your personal goals may require prioritizing your goals and adapting your goals to your changing circumstances.