How do you make a financial plan?
2. Be truthful with yourself
3. Make changes
1.) Start planning by finding out how much you make and how much you spend each month. You are going to list all your income and all your expenses on a monthly and an annual basis. Unless you do this, you will have no idea of where you can re-structure to save money, pay bills, etc.
Income is relatively easy if you work for somebody. You list the net income your receive monthly – that means the amount of the paycheck you receive, not the gross amount subject to taxes, but the amount after taxes are taken out. We want to focus on the amount you have in hand to pay your bills each month.
If you work for yourself, figuring out your income is a lot trickier.
First, take a look at the gross amounts you have received in your self-employed role over the past year or two and divide the number by twelve to get an estimate of your monthly income. If you know your tax bracket, deduct that percentage from the gross amount and come up with a monthly net income. While your business will naturally have ups and downs, you want to start with as credible a number as you can for what you ordinarily earn per month.
Next list any other income you have. If you have had annual bonuses, estimate that amount and add a monthly amount to your income. If you are planning with your spouse or significant other, add that income.
It’s easier to list the income than it is to figure out your expenses. Hopefully, you have assembled all your regular monthly bills so you can refer to these.
First up, mortgage payments or rental expense. Next, utilities costs, property taxes (if not paid through the mortgage), home insurance, home maintenance costs. Then, what it costs you to go to work. Transportation costs including car payments, gas, maintenance, parking, metro cards, etc. Health insurance and estimated medical bills that are not covered by insurance, like dental and vision costs. Food and clothing costs come next. Then, any taxes. Finally, credit card amounts, student loan amounts, any other loan payments you are required to make.
Subtract the expenses from the income and take a good hard look.
2.) Tell the truth- to yourself. Strangely enough this is the part of the process most people do not adequately complete. You know the computer saying “garbage in, garbage out.” Unless you are truthful about your income and expenses, that’s what you will get-garbage. So, be honest with yourself.
When you add up all of the expenses, if you are spending more than you make, you have three choices: (1) increase your income by finding another job or asking for that raise; (2) decrease your expenses by saving on any one or more of the items you have listed; or (3) do nothing and hope for the best.
3.) Change. Why do I describe doing nothing as a choice? Because it is certainly a choice you have made. You have decided you cannot change. Ignoring your financial situation and hoping for some sort of miracle, like winning the lottery, is just plain crazy. You do not have to be a “do nothing” person. You can change and you can do it immediately. It doesn’t take a college degree to make a financial plan. Nothing should hold you back from figuring out how you can make your life better for you.
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.