No matter if you are doing it alone or with a financial adviser, the first step in financial planning is to gather a lot of bits and pieces that represent your net worth. You need to look holistically at all your assets and liabilities and put them into some order.
“It is not how much you have spent, but how much you have left after you have spent that actually determines your net worth. ”
Assets and liabilities
Your assets can include a home, a car, some cash you keep in a bank account or at home, investment and retirement accounts, valuable possessions, such as jewelry, art, precious metals, cryptocurrencies, and so on. It might take some time to find the papers, log in to multiple online accounts and take snapshots. The good thing about this is that it is a one-time exercise and once you have gone through, it takes only a few minutes to keep it updated. To keep track of how your net worth increases in future, you can model the inflows and outflows and through regular updates check if your net worth is improving overtime.
Your liabilities are all credit cards, student debts, outstanding mortgages, vehicle loans, taxes and expenses. It is important to know what you owe, what are the interest rates and when you can achieve off-debt status. Regular expenses such as food, clothes, education, entertainment, etc. are usually not considered liabilities; they are taken into account in your cash flows.
Once you have finished with these big items, it is time to determine your regular cash flow. It would be best if you are already using a budgeting tool; in this case you can have a very detailed view on your incomes and spends. If you are not a fan of regular expense tracking, you can look at your statements for several months or an year and approximate the spends and incomes per month to create your regular cash flow.
Cash flows represent the total amount of cash that you receive or give away, reported over a certain time interval (e.g. monthly or yearly).
Having the net worth and the cash flows are your first cornerstones of your financial plan.
If you use a tool such as ViziWealth or a more sophisticated excel table you will be able to view not only the current state but also project a future outlook. Having this balance is the basis for your financial planning. You can now see how to fit goals, what can be some of your future financial strategies, and have greater transparency overall.