by Kelly Lapp

Created on: October 01, 2008   Last Updated: December 09, 2008

Financial planning is a broad topic that covers issues such as budgeting, saving, investing, buying insurance, choosing a financial planner, and preparing for retirement. With the plethora of information currently available, consumers are better able to make wise decisions regarding their money. But, where should you start?

Financial planning starts by asking three basic questions: Where are you now? Where do you want to be? What is the best way to get there?

Where are you now?

The first step is determining where you are by looking at your net worth and your budget. This can be a difficult step because it requires an element of honesty, and maybe even humility.

Your net worth is defined as the value of your assets minus the value of your liabilities. In layman's terms, assets are items that increase in value (savings accounts, stocks, bonds, houses) and liabilities are items you owe (mortgage, credit card balances, loans, medical bills). Your wealth is what is left over when you take all of your available assets and subtract all of your debt. The reality is that a person earning six figures is not considered wealthy if he owes more than he owns.

Your budget is a picture of your cash flow of how much you earn, how much you spend, and how much, if any, is left over. Start by calculating how much you earn on a monthly basis. Then, track your expenses for a month. Write down every penny you spend and what you spend it on. You might be surprised how much money you spend on impulse buys or on unnecessary items. It all adds up after a month.

Now, take an honest look at where you are. Do you owe more than you own? Do you spend more than you make? What items in your budget are necessities and which ones are comforts? Which items might you be willing to do without if it meant having something else? There are not necessarily right or wrong answers to these questions. Your preferences are fine as long as you can live with them.

Where do you want to be?

Taking a truthful look at where you are financially is an important process, but the real point of financial planning is preparing for where you want to be. So, the next step is to set both short-term and long-term goals for your finances. Short-term goals might include creating an emergency fund or paying off certain debts. Long-term goals might include saving for retirement, owning a home, or creating a college fund for your children. Whatever your goals are, make sure that they are realistic and specific. Don't just

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