Financial Planning In Insurance Pdf – How are you doing financially? You should ask yourself this question from time to time, and it should definitely be your starting point when you decide to start a more formal financial plan. The first step in solving this question is to collect and analyze records of what you
) the difference between your assets and liabilities. So the formula to determine the net worth is:
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. To find out if your net worth is on the plus or minus side, you can prepare a personal net worth statement A personal balance sheet that shows the value of the things you own, the amounts you owe others, and the difference, called “net worth.” like the one in Figure 14.6 “Net Worth Statement,” which we designed for a fictitious college student named Joe College. (Note that we’ve added lines for items that might be relevant to some people’s net worth, but leave them blank when they don’t apply to Joe.)
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Note that we have taken care to calculate Joe’s assets in terms of their fair market value. The price you will get by selling assets at the current price. – the price he would get by selling them now, not the price he paid for them, or the price he would get at some point.
Finally, note that Joe has a positive net worth. At this point in the average college student’s life, a positive net worth can be a little strange. If you happen to have a negative net worth right now, you technically do
, but remember that the main goal of getting a college degree is to enter the workforce with the best chance of generating enough wealth to turn that situation around.
. This is a cash flow function or income statement that shows where your money came from and where it is planned to go. , which shows where your money came from and where it is planned to go.
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– incoming income) comes from two sources: student loans and income from part-time work. Its costs (money
—money runs out) in several categories: housing, food, transport, personal and health care, leisure/recreation, education, insurance, savings and other expenses. To find out about Joe
Joe has been able to maintain a positive cash flow for the year to 31 August 2012, but is winding down. Also, he’s in the black solely because of student loan inflows — income which, as you’ll recall from his net worth, is also an absent liability. However, we’re willing to give Joe the benefit of the doubt: Even though he suffers from high education costs, he’s willing to commit to the debt (and, we assume, to prudent spending) because he believes that education is an investment that will pay off themselves in the future.
Remember that when you build a cash flow statement, you only need to record income and expenses that relate to a specific period, whether it’s a month, a semester, or (as in Joe’s case) a year. Also remember that you must calculate both inflows and outflows
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: you record income only when you receive money, and you record expenses only when you pay money. For example, when Joe used his credit card to buy his computer, he didn’t pay any money. However, all monthly payments on his credit card balance are payments that must be recorded on his cash flow statement (depending on the type of expense – eg shipping – leisure/entertainment, food, transport and so on).
, that’s because you spend more than you earn. Ultimately, your net worth and cash flow statements are most valuable when you use them together. While your net worth tells you what you’re worth – how much wealth you have – the cash flow statement shows you exactly how your spending and habits affect you. Save your fortune.
We know from Joe’s cash flow statement that despite his limited income, he believes he can save $1,200 a year. Of course, he knows that it’s good to have some money in reserve for emergencies (car repairs, medical needs, etc.), but he also knows that by putting away some of his money (perhaps weekly) he’s developing a habit he’ll need if he hopes to achieve its long-term financial goals.
What exactly is Joe’s goal? We have summarized them in Figure 14.8 “Joe’s Goals”, where, as you can see, they are divided into three time frames: short term (less than two years), medium term intermediate (two to five years) and long term ( more than five years). Although Joe is still in the early stages of his financial life, he has identified and structured his goals quite effectively. In particular, they satisfy four criteria for well-designed goals: they are
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.Jack R. Kapoor, Les R. Dlabay, and Robert J. Hughes, Personal Finance, 8th ed. (New York: McGraw-Hill, 2007), 81.
They are also smart. For example, Joe sees no reason why he can’t pay off his car loan, credit card and spending account within two years. Remember, with no income other than student loans and a salary from a part-time job, Joe has decided (rightly or wrongly) to use his credit cards to pay for much of his personal spending (furniture, electronic equipment, and so on). forward). Paying off those balances won’t be an easy task, so we’ll give him credit (so to speak) for seeing them as important enough to pay them off among his short-term goals. After graduating college, he splurges and takes a month-long vacation. It may not be the best thing to do financially, but he knows it may be his only chance to travel far and wide. It is realistic in its classification of student loan repayment and home purchase as long-term housing. But he may want to revisit the decision to save for retirement as a long-term goal. This is something we think he should start with as soon as he starts working full-time.
After reviewing the statement of cash flows, Joe has a much better idea of his cash flows for the year ended August 31, 2012, and a much better idea of where it went when it flowed out. Now he can ask himself whether he is satisfied with the annual grant (income) and departure (expenses). If he’s like most people, he’ll want to make some changes – maybe increase his income, cut back on his expenses, or, if possible, both. The first step in making these changes is to prepare a personal budget, a document that outlines sources of income and expenses for a future period (often a year). – a document setting out the sources of his income and expenditure for the coming year, together with appropriate sums of money for each.
So, by going through his numbers, Joe developed the budget in Figure 14.9 “Joe’s Budget” for the year ending August 31, 2013. First, look at the column titled “Budget.” If things go as planned, Joe expects to have a cash surplus of $1,600 by the end of the year—enough to pay off his credit card debt and have $400 left over.
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Now we can examine the two remaining columns of Joe’s budget. During the year, Joe will keep track of his actual income and his actual expenses and enter the numbers in the column titled “Actual.” However, like most reasonable people, Joe doesn’t expect his numbers to match the budget numbers. So when there is a difference between an amount in the “Budget” column and the corresponding amount in the “Actual” column, Joe records the difference, either plus or minus less, as a difference between the actual amount and the budgeted amount. . Two types of differences appear in Joe’s budget:
Before we leave the subject of the financial planning process, let’s return to the subject of Joe’s goals. Another look at Figure 14.8 “Joe’s Goals” reminds us that Joe has set very simple goals at the current stage of his financial life. For example, we know that Joe wants to buy a home, but when will he take this big financial step? And of course Joe wants to retire, but what kind of lifestyle does he want when he retires? Does he, like most people, expect a retirement roughly comparable to his best working years? Will he be able to afford both a comfortable retirement and, say, the cost of sending his children to college? As Joe and his financial situation mature, he must articulate these goals (and a few others) in more precise terms.
Let’s fast-forward a decade or so, when Joe’s picture of Stages 2 and 3 of his financial life cycle has come into sharper focus. If he has not already done so, Joe is now ready to identify a primary goal to guide him in identifying and achieving his other goals. Right. (Upper Saddle River, NJ: Prentice Hall, 2003), 57–58. Imagine that because Joe’s investment in a college education has paid off
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