Creating a personal financial plan doesn't have to be a deep dark mystery. It is simply a process of creating a few basic tools (actually, filling in some forms) and assessing the realities that appear ‘on the bottom line.'

The first step is to organize the basic information you need about your financial situation.

Assess Your Financial Situation

In order to know where you're going, you have to know where you are. That's the purpose of a Net Worth Statement. It provides a snapshot of your current financial situation, and gives you important clues about where you should concentrate your financial planning efforts. Net Worth Statements are also useful when you're applying for a mortgage, credit card, car loan, or college financial aid for your kids.

Simply, your net worth is the difference between all the things of value that you own, and all the debts you owe. In financial terms, your net worth is the total of all your assets minus your liabilities.

If you have more assets than liabilities, you have a positive net worth. This is a good thing. If you have more liabilities than assets, you have a negative net worth. This is not such a good thing, but it's information you need to know.

To calculate your net worth, list the things of value that you own:
• Cash and cash equivalents, such as Certificates of Deposit (CDs), money market accounts, bank accounts
• Investments, such as stocks, bonds, mutual funds, savings bonds
• Retirement funds, such as 401(k) or 403(b) plans, Individual Retirement Accounts (IRAs), company pension plans, include only the amounts which are fully vested
• Real estate, including your home, if you own it, and any other real estate or personal property such as boats, cars, RVs, planes
• Household goods, such as furnishings, jewelry, furs, collectibles and antiques. Use the estimated fair market value, which may be more or less than what you paid for the item. Fair market value is “the price a willing, rational, and knowledgeable buyer would pay.” For cars, use their Kelley Blue Book value.

When you've listed everything you can think of, total your liabilities, or amounts you owe others.
• Loans (including your mortgage, if you have one), student loans, bank loans, car loans
• Credit card balances, including major bank cards like Visa or Mastercard; department store cards and gas cards
• Taxes owed, such as real estate taxes or income taxes
• Any miscellaneous amounts that you owe.

Now subtract your liabilities from your assets. Is the number positive (you have more assets than liabilities)? If so, give yourself a pat on the back; you can begin planning how to increase your net worth.

Whether you have a positive or negative net worth, you should now have a better idea of your true financial state. The next step in the process is to see where you're spending your money—and to more effectively control and direct that spending.
The Budget

A budget, or spending plan, lists your income and expenses by month.

If you are starting out on your own for the first time, it's important to set up a budget and begin good financial habits. It may seem so basic that it’s unnecessary. However, debt and mismanagement of your money can affect your ability to buy a home, take vacations and even alter your retirement plans. Here we'll give you the basics for creating a simple household budget.

Where does it all go?

Take your monthly gross income and subtract any taxes or other mandatory expenses. What’s left is your disposable income. Next, list all of your monthly expenses. What follows is a general list—be sure to customize it to your individual situation. If you have a car or motorcycle, for example, be sure to include a provision for repair.

Monthly Expenses
• Housing (rent or mortgage)
• Utilities (homeowners must include water and sewer charges, etc.)
• Food
• Transportation
• Insurance
• Debt Repayment (loans, credit card bills)
• Cell Phone
• Entertainment and Recreation
• Clothing
• Savings
• Medical/Dental
• School/Childcare
• Investments
• Tzedakah
• Miscellaneous

Don't forget the unusual expenses that arise in all of our lives. If we make provisions for them, there will be fewer ‘surprise’ expenses in the future.

Holiday and Birthday Gifts
Set aside a little every month to spend on these events.

Weddings and Baby Showers
If you are in your early to mid 20s, you can expect to be invited to a few weddings, bridal showers and baby showers each year. Being a best man or a bridesmaid is even more costly. Allow space in your budget for this.

Emergency Travel
If you live away from your family, you may be called to make sudden, unexpected trips in certain emergency situations or to attend funerals.

Office Parties
If you work with a group of people, plan on occasional birthday lunches and group gifts for retiring workers. Depending on your office size, you can set aside $5-$12 per month for such events.

Broken Appliances
Hairdryers, vacuum cleaners, telephones and other appliances have relatively short lives. Plan for occasional replacement purchases.

Entertaining
Parties, family dinners, holiday gatherings all have some added costs attached.

Change in Life Expenses
Marriage and children are wonderful, but they also have large expenses attached. With proper planning, the expenses are manageable. Research Bar/Bat Mitzvah and wedding costs carefully. Make decisions about catering, photography, etc. after you have planned a budget that you can handle.

Birth Expenses
Children are not only life changing, but also lifelong commitments. Plan beyond the delivery, diapers and doctor's visits. Make sure you budget for childcare, education, clothing and a home.

Add up all of your expenses and subtract them from your monthly disposable income. If you have a positive number (surplus) you need to think about how you are going to invest those funds. If you have a negative number (deficit) you need to economize.

Tracking Expenses

Here's an idea that can show you where you can economize. Try keeping track of every penny you spend for a month. This is actually a great exercise for everyone, regardless of financial position. It not only tells you where your money is really going, it shows your true priorities.

A trip for fast food twice a week adds up to approximately $520 at the end of a year; a couple of sodas from a vending machine, five days a week, can translate to $325 over the course of a year. Eliminate those two alone and you'd save enough for a modest vacation.

When you see all the expenses, including the ‘little things’ you may identify places where it's easy to make changes. Maybe you'll decide that instead of that daily bagel and gourmet coffee, you'll make breakfast at home and use that money to pay a bill or save for something you really want. That sacrifice may be worth it, if you have an extra $780 to spend on your wardrobe or a new stereo. Tracking your expenses is the first step toward defining your priorities and creating a realistic budget.