DEREJA ACADEMY

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Creating a Personal
Financial Plan
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Overview
Setting goals are important and often used to measure success. However, simply setting
goals does not ensure you will someday accomplish them. Achieving goals requires
establishing a plan. Planning is important to ensure a direction for your day-to-day
actions. Being deliberate about establishing a plan can help guide the decisions you
make to aid you in reaching your goals. The further your goals are from today, the
more important it is to have a plan to ensure your success in reaching those goals.
Think about it. You may not consult a map for a trip to the store across town, but
you will probably want directions, or a plan, for a spring break trip to California.

When it comes to personal financial goals, many can be long term. Paying off
student loans, a new car, or a mortgage on a home does not happen in a month or
even a year. Retirement is an even longer- term goal. When it comes to financial
matters, planning can be of paramount importance. Creating a personal financial
plan has six basic steps:

1. Determine your current financial situation

2. Develop your financial goals
3. Identify alternative courses of action
4. Evaluate alternatives
5. Create and implement your financial action plan
6. Review and revise the financial plan

It is never too early to begin planning. In fact, the earlier you begin planning for
your financial future, the sooner you will reach your goals. The worksheets on the
following pages will help you navigate the six steps outlined above for creating
your personal financial plan. Remember, your financial goals won’t be realized just by
setting them. You have to be intentional about creating a plan and diligent in
executing it. After all, directions to your spring break destination won’t do much
good unless you follow them.
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Step 1. Determine Your Current Financial Situation

Before you can begin setting goals and developing strategies to achieve them, it is important
to understand where you are now. The first step in creating your personal financial plan is
determining your current financial situation. Having a thorough understanding of your
current financial situation will help you to formulate realistic and well-informed goals.
Taking a detailed look at your situation may also help you identify specific changes you
could make to change your situation and help you achieve the goals you will create later in
the planning process.

To gain insight into your current situation, it can be helpful to determine your current net
worth. To calculate your net worth, you will need to total your current liabilities and subtract
them from your total current assets. Assets are simply what you own that has value. These
include: cash and cash equivalents, such as physical cash on hand, checking accounts, or
savings accounts; personal property, such as equity in a home, other real estate owned, or a
car; and invested assets, such as stocks, bonds, or pensions. Liabilities include value of what
you owe including current bills and outstanding debt. Utilizing the charts below, calculate
your current net worth.

Assets (What I Own)

Cash & Cash Equivalents
Cash on Hand Charge Accounts 100
Checking Account Credit Card Balances 2,000
Savings Account Utilities 500
Savings Bonds 200 Rent 1,500
Money owed to me Taxes 1,000
Total Cash Equivalents Other Bills 200
Personal Property Total Current Bills 5,300
Estimate Equity in Home
Household Furnishings Student loan balance 20,000
Specific Items of Value 50 All Other Loan Balances 5,000
Automobiles Total Outstanding Debt 25,000
Other Personal Property
Total Real & Personal Property Total of All Liabilities 30,300

Invested Assets
Stocks
Bonds
Others Net worth = Total asset- total
Total Invested Assets
liabilities Your Net worth
Total of All Assets
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Step 2- Develop Your Financial Goals

Once you have evaluated your current financial situation, you are ready to move forward
in the financial planning process. The second step is developing your financial goals.
Setting goals will give you a direction for your plan and a destination toward which you
want to head.

When creating financial goals, you will want to consider obvious objectives such as
monthly savings or retirement investments. However, also consider other goals you have
which may not immediately stick- out as financial ones. The goal of backpacking through
Europe upon graduation may not seem like a financial goal on its face. But, when
considering the cost of a three-week European vacation, you may want to think about adding
this goal to your personal financial plan. Do you think you may need a new computer within
the next couple of years? Maybe add purchasing a new computer in two years to your list
of goals. Anticipating future expenditures, you would like to make and incorporating them
into your financial plan can help you put yourself in a position to afford them as they arise
without having to make sacrifices elsewhere in your budget.

Your goals should be SMART, that is specific, measurable, attainable, realistic, and time-based.
You should also develop short-term, intermediate, and long-term goals. Developing each of
these types of goals will allow you to achieve successes early in the plan while also keeping
your eye toward the future. Short-term or intermediate goals may also serve as stepping
stones to reach long-term goals. For instance, a short-term goal of saving 2000 birr a
month may help you accumulate funds for the down payment on a home. An intermediate
goal of paying off student loan debt a year ahead of schedule may help you free-up
monthly income that could instead be used to make a car payment.

When developing your goals, be sure to differentiate between necessities and wants. Establish
priorities. Consider the net worth you calculated in step one and how realistically your
goals align with your current financial situation.

Considering the points in this section, reexamine the financial goals you set in Chapter
One. Using the worksheet on the following page, add to, amend or re-record those goals
for incorporation into your personal financial plan. Be sure to prioritize your financial
goals in order of their importance to assist you later in the planning process.

Once you have set your goals, refer to your target dateand the duration ofyourgoals’ coststo
determine a monthly cost that will be associated with working toward your goal.
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Target Date
High Save for House 500,000 180 months 2,778 15 years
Downpayment
High Retirement Savings 1,000,000 240 months 4,167 20 years

Intermediate Goals (1-10 years)

Priority Goal Total Cost Duration Monthly Cost Target Date

Long-Term Goals (Over 10 years)

Priority Goal Total Cost Duration Monthly Cost Target Date
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Step 3- Identify Alternative Courses of Action

So far in the planning process you have evaluated your current financial situation and
established some SMART short-term, intermediate, and long-term goals. But your goals
won’t be accomplished simply by creating them. You will have to devise strategies to help you
bridge the gap from where you are today to where you would like to be. Just as there is
more than one way to get from campus to your favorite ice cream shop in town, there is
more than one route you can take to achieve financial success as you have defined it. The
next step of the financial planning process involves identifying alternative courses of action
that can lead you to your goals.

Let’s suppose you’re planning to study abroad next year. You’d like to be able to make the most
of your experience while overseas and have enough financial resources to travel while
abroad. You have decided you would like to have saved 120,000 birr by the time you
depart in 15 months, specifically for your travel endeavors. Maybe your financial situation is
such that, so long as it persists in its current form, you will be financially prepared for your
travel adventures while abroad. But if you are like most college students, that is not likely.

Generally, your alternative courses of actions will fall into one of two categories:
reallocating existing resources, or generating new ones. Existing resources can be utilized
by earmarking current savings or shifting current allocations as in the example above.
Generating new resources may require changing jobs to improve your wage outlook,
taking on additional hours or investing your savings more aggressively to generate higher
rates of return.

Select one of your short-term, intermediate, and long-term goals you established earlier.
Consider the target date for accomplishing the goal and the monthly cost associated with
the objective. Brainstorm three different strategies for reaching each goal, making use of a
strategy from both categories discussed above.

Pay Off Credit Card

Target Date: 4 months

Reduce discretionary spending

Take a part-time job

Sell unused items

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Intermediate Goal:

Target Date: Monthly Cost:

Strategy 1:

Strategy 2:

Strategy 3:

Long-term Goal:

Target Date: Monthly Cost:

Strategy 1:

Strategy 2:

Strategy 3:

Step 4- Evaluate Your Alternatives

Once you have given serious thought to the options available that could lead you to your
goals, you may begin to realize just how many options there are. So, which courses of
action should you take to achieve your desired goals? The answer is: that depends. While
the Declaration of Independence tells us all men are created equal, the same may not be
said for the various financial strategies available to aid you in accomplishing your dreams.
Therefore, before you can select strategies to complete your financial plan, you’ll have to
thoroughly evaluate and weigh your options.
When assessing your options consider the pros and cons of each option. An option you are
considering to increase your income may be moving income you are saving from a savings
account to a stock portfolio. The change in investment methods may increase your rate of
return received on your savings, helping you generate new revenue without having to
work more hours. However, the stocks your savings are now invested in may also carry
substantially more risk than did the savings account in which you previously deposited
your savings. When evaluating your alternatives, also be sure to consider the opportunity
costs of what you will forego to pursue your goal through each course of action.
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Adequately evaluating each of your options can help to ensure you select the best course
of action to accomplish your financial goals. Using the chart below, consider one of your
goals from above and weigh two strategies you identified that could lead you to success.

Goal:

Reduce discretionary spending

Pros Cons
Immediate savings Requires strict discipline

Strategy 2:
Pros Cons

Step 5- Create and Implement Your Financial Plan

At this point, you have done the bulk of the work associated with creating a personal
financial plan. So far you’ve looked at your current situation, set goals, identified alternative
courses of action, and evaluated your options. Now it’s time to put all of the pieces together
to create and implement your financial plan.

As you put together your financial plan, it’s important to look at the entire picture. Having
identified options for reaching your goals and having weighed each strategy, it’s now easier
to look at the cost of your goals in terms of your current situation. This can help you to
prioritize your goals as you consider how much it will cost you to implement each one.

Finalizing your plan will require you to make decisions as to which goals to pursue and the
best courses of action to take. All of this will have to be weighed in terms of your current
situation and practical predictions for your future to maintain realistic and obtainable goals.

Once you’ve gone through the effort of creating your plan, discipline is paramount. After
mapping your path to your goals, it important that you follow that path. Be conscious
about establishing actionable steps you can take to lead you to success when creating your
plan. Having concrete steps to take will help you ensure you are doing what you need to do
to stay on track to accomplish your goals.
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Step 6- Review and Revise your Plan

The final step in developing a personal financial plan is perhaps the most important. You
may have done your due diligence at each step along the way and created a solid financial
plan. However, one fact remains: life happens. For this reason, it is important to review
your plan often and revise it as needed.

Reviewing your financial plan can help you to gauge your progress toward meeting your
goals. Original strategies may not be having the expected results and may require
adjustment to help you meet your goals.

Additionally, no matter how carefully you go through each of the steps to create your
financial plan or how perfect the plan may be when conceived, unforeseen events will
occur. Your financial situation will change from time to time. You may incur unplanned
expenses or receive unplanned incomes. These events may require you to change the path
you will follow to reach your goal.

Your goals may also change. While owning a home may not be a priority now, it may be a
goal you have later. As current goals wane from your list of priorities and you develop new
goals, your plan will have to change to help lead you to your new objectives.

The fact is your life will change. Your financial plan will have to change too. Be faithful in
reevaluating your plan from time to time to ensure your goals haven’t changed and that you are
on pace to reach those goals.