In this article, we will take a look at the example of personal financial planning, which was made with the help of Aurora – one of the personal finance apps. Step by step, we will go through the planning process and analysis. Starting from a forecast of personal earnings, we will finish with the planning of capital expenditures and capitalization of dividends. So if you need to write a personal financial plan, you can easily follow this example to reach the goal.
Personal Financial Planning Process
The first step of financial planning is a revenue forecast. According to the types of personal finance, all external income is personal revenue. The most common source of personal income is salary. So, this can be the entry point that will help us to start the planning process.
For example, during the year we are expecting a salary at the level of 2,000$ per two weeks. We applied this condition in the planning template, and as shown in Figure 1, the target salary for a year is 52,000$. For now, we leave personal revenue like that. Planning of interest and dividends is described in the advanced section.
After the income is planned, we can proceed to the planning of expenses. We will set a target value of 250$ per week for Consumer goods, 250$ per week for Rent, and 300$ per month for Entertainment (Figure 2).
Personal Financial Planning Analysis
The analysis of the personal financial plan includes the valuation of the total target value by the end of the planning period. According to the plan, we will earn 22 400$. On the waterfall chart (Figure 3) and in the table (Figure 4), we see the visualization and calculation of the target value. The linear chart (Figure 5) shows the dynamics of earnings accumulation. Based on the provided analytics, we can say that the plan is acceptable and corresponding to our financial goal.
Following a personal financial plan is as important as writing it. Regular analysis of variances between planned and actual values will help you to know the current financial position and make the right decisions. Analysis of the first half of the year (Figure 6) shows that the amount of salary is greater and covers additional expenses that made in other categories. The Linear chart (Figure 8) also shows that we are doing a little bit better than planned.
Advanced Financial Planning
This section describes advanced topics of personal finance and designed for those who want to plan investment activity and capital expenditures.
Interest and Dividends Planning
Consider that we want regularly transfer earnings to our savings account. As an example, let’s plan a monthly, 1,500$ deposit. By the end of the year, we are expecting to have a balance of 18,000$. Our bank also will pay us interest, thus we include this income in the personal plan.
The amount of free cash is reduced by the value of deposits to the savings account, and at the same time, we have an interest income. Since we started financial planning of capital, we have to distinguish Earnings from Investment activity. Figure 9 shows 22,689$ Earnings, 18,000$ Investment in the savings account, and 4,689$ Free cash.
Let’s considers an example when we get dividends and reinvest them back to stocks. We have a personal plan for a year to receive a 2,000$ dividend income. We are also planning to purchase stocks by the same value and at the same time. As Figure 10 shows, we do not affect the amount of free cash in this case.
Capital Expenditures Planning
Figure 11 – Planning purchase
Figure 12 – Withdrawing savings
Figure 13 – Postponing purchase
As an example, imagine that we are planning to buy a car at the price of 22,000$ in October. Figure 11 shows negative free cash, so we have to find additional funds in our plan. We can withdraw money from a savings account. But, as shown in Figure 12, there is still not enough cash in October. We see that balance becomes positive by the end of the year. It means that there will be no shortage of funds if we will purchase a car in December (Figure 13).
Personal Financial Planning Tips
You may notice there were other options to solve the problem in the example of the financial planning of capital expenditures. We could cut spending, get a car loan, or sell a stock, but we decided to delay the purchase. However, real-life decisions should always be based on the most effective money management strategy.
If those personal financial planning examples seemed complicated to you, we recommend starting with guide on personal balance sheet. After you’ll get the sense of financials it will be much easier to plan them.