If you are reading this, chances are, you have some sense of familiarity of the proverbial “sinking ship” that seems to occur when tough times hit. You are not alone. Over 90% of the population of the United States alone has experienced some degree of financial hardship – just in the past year. It is similar to a sinking ship. First, a leak develops. As much as you try to scoop out the water, it quickly overtakes the vessel. Before too long, you find yourself to the point of no return. Either a miracle happens or the ship finally falls below the surface of the water. The good news is, a financial plan is the perfect protective barrier for your ship. By establishing one now, you are less likely to find yourself pulling out your life vests.

What is a Financial Plan?

A financial plan is a document that is created that contains your current money situation. It also includes your long-term financial goals and the strategies that you are planning to utilize to achieve those goals. You may create a financial plan on your own or with the assistance of a financial planner that holds a certification. It calculates your current net worth, the amount of cash flow that you have, and it ends with a solid financial strategy that will keep your afloat during tough times.

How Do I Calculate My Net Worth?

To calculate your net worth for the purpose and intent of creating a financial plan, you must first outline your assets. This includes the amount of money that you have in the bank, any type of investment you have made in a 401(k) plan, your home, your vehicle, and any other commodity that you are the owner of that is considered to have value.

Next, you must outline your liabilities. This may include the amount you owe on your home and/or vehicle, any debt you have to credit card companies, student debt, and other items in which you owe. Once you have your assets and liabilities outlined completely, you will total up the amount for the assets. Once you get that figure, subtract any liabilities that you have. The remaining number is what your current net worth.

How Do I Calculate the Amount of Cash Flow That I Have?

The next step in creating a financial plan is to determine the amount of cash flow that you have. You may use your bank statements and credit card statements to complete this step. Essentially, just identify where your money is going every month. You should attempt to get a completely thorough history of your spending. You may have to review your spending over several months or the entire year to get an accurate snapshot of where all of your money is going.

As you evaluate your financial records, you will find which spending categories apply to you. You may find that you have an expensive hobby or a taste for a particular food or drink that is resulting in high costs. Once you figure out how much you spend a month, divide the figure by 12. This will give you your cash flow total. This is the time to consider your financial priorities or long-term financial goals. You will want to identify where you can cut your costs during this step.

Categorize and Budget

Now that you are familiar with the different spending categories that apply to you, outline them. It is time to create a budget. You should never budget more than you make. Since you are creating this financial plan to keep you afloat during difficult times, you should always put back some of your money. If you prefer, you may set it back in percentages or in set amounts. For example, you could save 15% for hard times from each pay period, or you may elect to put back $50.00 or more each pay period – the choice is yours.

Designated Savings Account

A critical component of your financial plan is saving money for the future. The best way to do this is to set up a designated savings account that pays interest on the money that you save. Once money is placed into this account, you should leave it there. Make a point to only spend it if and when the time calls for it. As the money continues to accumulate, the bank will pay a certain amount of interest on that which you have saved. While this may start as only pennies, it is money you didn’t have before. The more you save -as time progresses -the more you will accrue in interest. If you would like assistance setting up your emergency savings account, contact us here at Somerville Bank.

Live Frugally

Once you have a financial plan put into place and have your designated savings account all set up, it is time to commit to living as frugal as possible. There are numerous steps you may take to cut back on costs. You may cut out excess entertainment expenses, reduce how much you eat food from restaurants, reduce transportation expenses if you live close to work, get a cheap cell phone service, and similar actions. While it is possible to still live comfortably while living frugally, you must remember it is not easy to live comfortably if you tie up all your income in expenses such a difficult time start to arise.

Somerville Bank

We here at Somerville Bank are standing by to assist you with all of your financial planning endeavors. If you want to save money by setting up a financial plan, our certified financial planners can assist you. Furthermore, we can help in exploring all of the services that we offer to our customers to determine which ones best suit your individual needs. Simply contact us at one of our many locations today to learn how we can help you and/or to set up your designated savings account for your emergency fund today: https://somervillebank.net/