Creating Financial Clarity in Three Steps

Creating Financial Clarity in Three Steps

A critical part of any kind of financial planning is working backwards from success. Having a general idea of “best practices” to follow in the day-to-day is one thing, but it’s impossible to create a roadmap if you do not understand specifically where it should lead.

For those new to the financial planning world, this can be a somewhat daunting task: where do you want your financial portfolio to be? “As high as possible, of course,” is the answer that most of us would give. But gauging the growth potential of your current assets, evaluating the risk you are willing to undertake with them, and putting hard numbers to the end is challenging work. We’re here to help you get through the task and set realistic, attainable goals that will benefit both your immediate portfolio and your long-term outlook.

Step 1: Survey the Landscape

Determining your financial standing is not as simple as looking at the monthly budget. Direct cash flow and expenses are an integral piece of the puzzle, but projected future changes should be taken into account as well. Expected raises or bonuses, geographical moves, and more contribute to the overall picture of your net worth. Many worksheets can be found on the Internet that will break down your asset/liability picture in exhaustive detail. After filling one out, you’ll be led to one of three conclusions: assets equaling, exceeding, or falling short of your liabilities.

Ideally, of course, your assets will exceed your liabilities to create a strong starting point for financial growth — but if that’s not the case, you can create steps to adjust your situation and attain your long-term goals.

Step 2: Prioritize Short- and Long-Term Goals

Again, setting goals is a predictive practice rather than an assured, concrete one. With this in mind, it’s best to start large, with general life events, and narrow down their specific financial implications. Do you plan to retire? If so, when? Do you and your spouse have plans for children in two years, or five, or never? Will you go back to school for a career-boosting accreditation? Is your student loan debt minimal and with a set end date, or will it hover around for years without aggressive repayment? Once you’ve determined these, set short and long-term plans: “My mortgage will be one-third paid by next year and fully paid by my 45th birthday,” “I will have a college savings account for my child equaling $X by 2020,” et cetera.

Step 3: Create Action Steps

Now the fun begins: manipulating the numbers so your current portfolio will work for you to attain these goals. Three key factors to keep in mind are your plan’s flexibility, or how easily it can be adjusted; liquidity, or how mobile the assets are rather than being tied up in investments; and taxation, or how best to distribute your funds as to not incur unnecessary taxes.