The five areas of personal finance are: financial goals, long-term planning, assets and liabilities, retirement funds and liquid assets. Financial goals can be set for the next year, five years or ten years. Long-term planning is done for a minimum of twenty years. Assets and liabilities should be assessed every year as to whether or not they are in need of updating.
The area of planning is the first of the five areas of personal finance. In this area, financial professionals to create a comprehensive written lifetime financial plan, including education, investing for the future, estate planning, tax returns, and living expenses. This plan is presented to the client for review and approval. The client’s goals are the primary focus of this process. Assets and liabilities are also analyzed and updated on a yearly basis.
The second area is to identify the assets that are most worth taking and the ones that require the least expenditure. Once again, the assets must be those that will benefit the client in the future. A comprehensive written financial plan is created to include the current and future income as well as expenses. Retirement funds are the final area of personal finance to discuss.
These areas include saving for the future, saving for a mortgage or other loans, protecting wealth, paying off debts, investing, saving for taxes and contributing money to the charity of choice. For any combination of these areas, there are experts who can help. The five areas of personal finance are the basic framework, which can be further defined and modified as needed. Again, the client’s goals are at the core of this framework.
This is an excellent place to begin the process of determining what are the areas to modify, update or enhance in order to reach the final goal. Once those are identified, there is a list of the areas to contact individual subject experts in each area. Each has their own specialty and area of expertise. Each should be contacted and should be reviewed in detail to ensure the goals are being met. The final step is to contact the ten deliverables and to review the plans and the areas of personal finance support in order to identify any changes. This will assure a solid foundation is built and a plan is in place for sustained support.
One of the areas to touch in the overall framework for personal finance is the tax projection. This includes the income and taxation aspects of the future. It is important to know the tax rate, since it will be used to determine the annual cost of living allowance and annual investment returns. The tax projection will be used to address the current and future funding requirements for programs such as retirement and healthcare, as well as potential debt burden due to student loans. The tax projection is the greatest probability strategy (gps) step-by-step implementation plan-of-action, since it is the most important determinant of the overall path for investing and spending. All future spending and investing decisions should be made based on the tax projections as they will provide the most accurate estimate of future revenues and spending.
The next area to touch on is the cash reserve planning and analysis area. This involves the identification of the ten client goals with a specific time frame and goal payout. These goals should be reviewed monthly with the client and updated based on the current objectives. In addition to providing the funding required for the goals, the cash reserves must also be reviewed regularly to ensure the projected expenditure against the projected income are in line with the projected cash reserves. If they are not, it may be necessary to reduce spending, reallocate funds to increase the cash reserves or invest to bring the balance closer to the goals.
Finally, the most difficult area is the budget preparation and analysis process. This is where the finance section of the budget blueprint is used to create an effective budgeting process that will be used year-round by the management team. The process begins with setting the goal, which is the desired end result; defining the goal (such as raising a family, purchasing a home, or saving for retirement) and beginning to develop the budget plan (which includes the financial subject expert, the written goals, and the steps to achieve those goals). Then, at the monthly or quarterly target meeting, the client’s goals should be reviewed based on the budget presented at the previous meeting and the most recent personal finance report (the income and cash reserve projections), as well as any other necessary adjustments to the plan based on the goals defined in the budget.
