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Educational Programming Video

The Value Line Mutual Fund Survey
Program 12: Financial Planning – Part 1


In this lesson, we'll discuss the importance of making a plan. Although this sounds simple, it's really not. You can't just say, "I want to be a millionaire" and call that your plan. You need to sit down and think things out.

The purpose of financial planning is to build and preserve wealth. Investing is only one part of an overall financial plan. Other aspects include insurance coverage, tax planning, retirement planning, and estate planning.

Investing, the main focus of this series encompasses all means by which one accumulates assets. In investment planning one must consider all asset categories: a home or other real estate, tangibles such as collectibles or gold and jewelry, the cash value of any insurance policies, social security benefits and the value of other retirement plans, savings accounts, and traditional financial investments such as stocks, bonds, and mutual funds. Factors that will affect an investment program include one's family situation, age, tax status, income requirements, and specific financial goals.

Before you can start doing anything, you need to know where you are. Starting a financial plan without knowing your starting point is like planning a trip to Tampa, Florida without knowing that you're starting in West Orange, New Jersey. In other words, it's close to impossible.

The first thing you need to do is figure out your net worth. This may sound like a difficult task, but it's really not. Just take a sheet of paper, fold it in half, and write assets on one side of the fold and liabilities on the other. Under assets, write down everything you own that has tangible value, such as stocks, bonds, a house, a car, etc. Under liabilities write down everything you owe, such as a home mortgage, car loan, student loan, and credit card debt.

Now add each column up and subtract your total liabilities from your total assets. The resulting number is your net worth. If the number is small, don't worry! Homes are very expensive and, since they are financed over time, they can make your current net worth small. Student loans can have the same effect. The point to remember is that you are paying this debt off slowly and over time and you can still save while you pay it off. If credit card debt is high, then your first goal should be to pay off this high cost debt before you start saving. In most circumstances, you will save more money by not paying 20% a year in interest on your credit card debt than you can make by investing.

Now that you have created your own personal balance sheet (a fancy term for folding a sheet of paper in half), you need to plan a budget. To do this will take a bit more time than a balance sheet.

What you need to do is take a small notebook with blank pages in it. For one month you should write down, on a daily basis, everything you buy and any money that you earn. From the mortgage payment to the cat food, everything should be put down. You don't have to get so fine as to write cat food, but groceries is a valid category. Don't skimp or fudge, you will only hurt yourself if you try to make your spending habits look better than they really are.

After the month is over, review your spending habits and create logical categories, such as entertainment, groceries, mortgage, and car loan. This is the basis of your financial plan, so you should create categories that make sense to you. Also create earnings categories, such as salary, dividend payments, or social security. Once you have broader categories, add up how much you spend or earn per week by category. Also add the amounts up for the entire month.

Now total everything up and look at how much you spend versus how much you earn. If you spend more than you earn you have some work to do; if you end up with money left over, you're on the right track.

Now the hard part. Look at what you spend your money on. Ask yourself if you really needed to spend money on each item. For example, if you eat breakfast out every day, you could be spending $20 to $40 dollars a week, when you could save a lot by eating cereal at home. The same goes for lunch and dinner, and even the quick coffee breaks you take. Not that you have to cut out everything you enjoy, but reining in frivolous spending habits is important to long-term wealth. The more money you have after all of your expenses, the more money you will be able to invest.

Now you have a starting place. You know how much money you have, how much you spend, how much you earn, and how much money you have left over to save. On a simple level, you have some near-term goals to increase the amount of money you save each month. But what do you really do with this information?

Not much. The starting place is only one part of the financial planning puzzle. Our next step is to create some goals.




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