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Financial Planning 101 By Debra Neiman
Take control of your personal finances and increase your net worth with these eight easy steps to financial planning.

Most people have heard of the benefits of personal financial planning and want to better manage their personal finances. Yet it can seem so overwhelming. If you're not sure where to start, this financial planning primer can help. It establishes priorities for anyone at any financial stage of life and lays out, in eight simple steps, just how to take control of your finances.

Step 1. Create and review a financial plan. Basically, a financial plan is a written set of goals, strategies and timelines for accomplishing these goals: buying your first home, funding or managing a retirement nest egg, funding your children's education, paying off debts, and so on. Writing out this plan, whether on a yellow pad, a spreadsheet or with the help of a certified financial planner (CFP) professional motivates you to be accountable and implement your to-do list of action steps. It provides direction, gives you a benchmark from which to evaluate your progress, and helps you prioritize the most efficient use of your financial resources.

Be sure to review your plan periodically to adjust for changing financial circumstances or desires, or life events such as a change in marital status, job loss, retirement, the birth of a child, or a death in the family.

Step 2. Organize your financial records. It's much easier to successfully manage your finances if you know what those finances are. So gather up the following financial records:

  • investment accounts
  • bank statements
  • tax returns
  • mortgage and credit card statements
  • insurance policies
  • estate planning documents

Then organize them so you can find and access them easily. By getting them all together, you'll be able to more easily evaluate where you're at today and can set the stage for your goals and priories going forward. And while you're at it, don't forget to inventory your personal possessions. This documents not only their value for planning purposes but also provides a record for your insurance company in the event your possessions are lost due to a theft or natural disaster.

Step 3. Calculate your net worth. Once your financial records are organized, calculate your net worth. This is simply a matter of figuring out what you own less what you owe. If your assets (house, bank accounts, investments and so on) exceed your liabilities (mortgage, student loans, credit card debts, etc.), then your net worth will be positive. On the other hand, if you owe more than you own, you'll have a negative net worth.

Net worth is the best measurement of the state of your financial health and should be used as the basis for any financial decisions you make. Your goal should be to increase your net worth on an annual basis. At year-end, you should recalculate your net worth and compare it against last year's benchmark. By doing this, you'll instantly be able to see your progress.

Step 4. Establish a spending plan. A spending plan details where your money comes from and where it goes. The inflows include your salary, bonus, interest income and any other source of income you have. Inflow is the part that's generally easiest to recall. The outflow section is a detailed listing of where your money goes. The most important outflow should be your savings. If you're living within your means, then your inflow will equal your outflow.

Having a balanced spending plan should be a financial priority regardless of where you are in life or what your net worth is. A spending plan identifies the key areas where you want your resources to go and highlights wasted spending. It can also provide an early warning of impending financial problems.

If this is your first time establishing a spending plan, consider using a software tool such as a spreadsheet or a software package like Quicken to help you. These tools could significantly cut down the amount of time and effort it takes to develop your plan.

Step 5. Build an emergency fund. Ideally, you want to have enough cash on hand to cover three to six months of basic living expenses should you lose your regular sources of income. Depending on your job security, you may want to increase the number of month's worth of reserves. For example, self-employed individuals may want to have twelve months of reserves, especially if their income is variable in nature.

Step 6. Reduce or minimize consumer debt. Debt drags down the rest of your financial efforts like a heavy anchor. If your consumer debt--credit cards, student loans, auto loans and personal loans--is eating up 15 to 20 percent or more of your monthly spending, make reducing it a priority. And why waste funds paying what are most likely very high interest rates on your cards and loans?

Step 7. Draft four, key estate-planning documents. Every adult should have (1) a will; (2) a durable power of attorney, which appoints someone to handle your legal and financial affairs if you're unable to; (3) a living will, which declares what life-sustaining medical treatments you want should you be incapacitated; and (4) a health-care durable power of attorney, which appoints someone to oversee your medical interests should you no longer be able to. Different states have different names for the medical documents, but they're all critical to your smart financial planning.

Step 8. Obtain adequate insurance. Managing risk is essential to your long-term financial security. The point of having insurance, from medical and disability coverage to life, auto and homeowner's, is to protect you from financial catastrophe. Simply stated, you buy insurance to cover expenses you couldn't make out of your own pocket. It's imperative to keep in mind that you should buy insurance when you don't need it, because when you do need it, you can't get it.

Five C's of Bank Financing By Art Beroff and Dwayne Moyers

Do you know what banks look for when lending to entrepreneurs? If you don't, then it's time you learned the 'five C's.'

The basic bank term loan is still one of the cheapest, most popular ways to finance a business. Term loans typically have fixed interest rates, monthly or quarterly repayment schedules, and a set maturity date. You will have to put down 20 to 25 percent of the total you want financed, because the banks want you to carry some of the risk. What do banks look for when deciding to make loans? The "five C's" are of the utmost importance:

1. Character: How have you managed other loans (business and personal)? What is your business experience? If you're a corporate executive and want to open a restaurant, you'd better have some restaurant experience.

2. Credit capacity: The bank will conduct a full credit analysis, including a detailed review of your financial statements and personal finances.

3. Collateral: It's the primary source of repayment. Expect the bank to want this source to be larger than the amount you're borrowing.

4. Capital: What assets do you own that can quickly be turned into cash if necessary? The bank wants to know what you own outside of the business--bonds, stocks, apartment buildings--that might be an alternate repayment source. If there is a loss, your assets are tapped first, not the bank's. You will most likely have to add a personal guarantee to all of that, too.

5. Comfort/confidence with your business plan: How accurate are your revenue and expense projections? You can expect the bank to make a detailed judgment. What is the condition of the economy and the industry?

Pay attention to the following "red flags," which make a banker less likely to lend to you:

  • Poor credit reports: If your credit report is blemished, the bank will naturally wonder why you would pay it on time when you have failed to do so for others.

  • Absence of a down payment: If you don't have a down payment ready, expect the bank to assume you have not thought ahead.

  • Poor collateral: Banks want to see liquid assets, which will be assessed on their market value, not on what you paid for them or what you think they're worth.

  • A poor business plan or none at all: Make sure you have one, and be sure it's realistic.
    • Creating a 12-Month Budget By Pam Newman
    Get your finances in order for the entire year with these steps for preparing a monthly budget.

    It's that time of year! Have you started your budget for the new year? A budget is part of your financial roadmap. How do you know where you're going if don't have a destination selected and the road that you're going to take mapped out?

    Budgeting shouldn't be approached as something to do when you have time, but instead as a priority and part of your overall business financial management plan. Breaking your budget into monthly increments will ease the process, making it less overwhelming. Prepare some general goals for your financial budget for the year, then see how you can achieve that goal--one month at a time--through a monthly budget.

    Getting Started
    Budgeting doesn't have to be an overwhelming task. We'll often use the excuse that we don't know "how" to do a budget because our income and/or expenses are too hard to predict. Don't you want to have an idea of where you're going? The challenge for the new year is for you to be more proactive with your business financial picture. Here's how to begin.

    1. Analyze your current and prior year(s') budget. It's always a good idea to know where your starting point is! Utilize a simple format for your budget based on the profit/loss format:

    Income
    - Cost of Goods Sold
    - Overhead Expenses
    = Net Income/Profit

    Don't get confused though! Cash and income are two different concepts.

    2. Use the budgeting features in your bookkeeping software to assist you. QuickBooks has a great budget format ready for you based upon your profit/loss format.

    3. Assess your budget realistically. It's always a good idea to have an objective third party review your information. We tend to overestimate our income and underestimate our expenses.

    Make sure to document how you're coming up with your estimated numbers. For example, if you predict $10,000 in sales, you need to document that it's based on the following equation: the number of sales multiplied by dollar amount per average sale. This will give your predictions substance and allow better variance analysis when your actual figures vary from your budgeted figures.

    4. Compare your actual activities to your budgeted activities on a monthly basis. This comparison is what creates the real value for you. When you use QuickBooks, you'll have preformatted reports available that'll calculate variance between actual and budgeted income and expense items.

    We all have many demands on our time, but managing the financial aspects of our businesses is a responsibility that we need to take seriously. If this isn't one of your strengths, then find someone to assist you with this process. It's like any other skill--it takes time to understand the various aspects. There's no better time to take control of your business path than today!