How To Create A Financial Plan: Assessing Your Financial Situation

Planning your personal finances can be an arduous, and let’s be honest a boring task, but it is an absolutely necessary one.

Let’s say you want to hire a contractor to build your house, you sit down with her and go through all the designs you’ve dreamt up so she knows how to execute it. After the meeting, you notice she’s not written anything down, you’re obviously worried and ask her ‘How do you plan on building it?’, her response is “It’s in my head, don’t worry I know what I’m doing”. Would you hire the contractor? I highly doubt it (if you said ‘yes’, well... let’s not even go there).

According to a survey conducted by the Certified Financial Planner Board of Standards, 52% of people with a financial plan feel more confident about managing money, savings and investments. Interestingly, 48% of people with financial plans describe themselves as living comfortably. That may not sound exciting to you, but living comfortably and feeling confident about money are life goals.

If you can afford to see a certified financial planner, I recommend you do!. Please be sure to do extensive due diligence before you hire one. However, if like most people, you can’t afford one, in these next series of articles, we’re going to go through these 4 simple steps I followed to put together a plan:

  1. Assess your current Financial Situation
  2. Develop SMART Financial goals 
  3. Determine your Strategy 
  4. Review your Plan 


Assessing your current financial situation

If you don’t know where you are, how will you know where you want to go? Before we begin setting goals and devising an investment strategy, we must first become aware of where we stand financially. Here are three metrics you should calculate to assess our current financial standing:


Net Worth

Your Net Worth simply refers to the value of everything you own, minus the value of everything you owe. The first step is to develop a list of your total assets and liabilities.

Liabilities include loans, the balance on your mortgage and credit card, bills you owe, etc.

Assets include cash in your current and savings accounts, the value of your property and business if you were to sell now, your pension fund, investment funds and expensive items (100,000 and above) like art pieces, jewellery, etc.

Once you’ve put together a list of your assets and liabilities, Subtract your Total Liabilities from Total Assets and this is your Net Worth

You might be disheartened by your Net Worth but hang tight. It's important not to get caught up by the figure, rather to think of your Net Worth as a way to track your financial progress. What really matters is the direction of its trend, if it’s always going up then you’re on the right path.


Cash Flow

Cash Flow is defined as the incoming and outgoing of cash over a selected period. In other words, your cash flow is the difference between your Total Income and Total Expenses over a month.

The process for determining your cash flow is very identical to that of putting together a budget. You simply have to note all your sources of income and all your expenses then subtract your Total Expenses from the Total Income and you’re left with your Cash Flow for the month. Rather than guessing, we suggest you refer to your most recent bank statements to get an accurate depiction.

If your Cash Flow is negative, this means you’re spending more than you’re earning and are not living within your means which is breaking one of the 10 commandments of personal finance. You can’t build wealth if you’re running on a deficit.


Savings rate

Your personal savings rate is defined as the amount of money you've saved as a percentage of your disposable personal income.

Determining your savings rate is a simple process starting with you noting your monthly income (if you’ve calculated your cash flow you should have this figure at hand). Next, note your monthly contribution to your savings and investment accounts and your pension, the sum of which is your Total Savings. Plug your numbers into the formula below:


Total Savings/Total Income x 100


What is a good savings rate? Most experts recommend between 15% - 20%. If your savings rate is less than this then I’ll advise you to work on increasing it!

Having a savings rate less than 15% means you’re probably not putting away enough for retirement, emergency expenses, rainy-day savings and goals like buying a house, etc.

To make calculating these values easier for you, I have put together a excel sheet you can download here. Feel free to customize the sheet to your needs.

Now you’re done with the first step of your financial plan! In the next article, we’ll be addressing how to identify and set SMART financial goals, we’ll need the figures calculated from the step highlighted above so please ensure you use the excel sheet.

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