Step 2: Prepare for an emergency Before doing any actual investing, you need to establish an Emergency Fund (cash held in an account for emergencies). This fund can be used for various emergencies, but, its main purpose is to pay your living expenses in event of a sudden loss of income. That is, if you lose your job, you will still be able to pay your bills without having to abruptly withdraw money from your investment accounts. A relatively conservative amount to keep in your Emergency Fund is that equal to 6 months of living expenses.

Step 3: Determine your goals Would you take a road trip without an ultimate destination? How long will trip take? What should you pack? In what direction would you drive? These questions are easily answered once you know where you are going. The same is true for investing. Before any investments are actually purchased, you must know your ultimate destination- you must create a list of your goals.

Determining your goals and writing them down will serve as foundation for a proper investment plan, allowing you to customize your investments to each specific goal. Some examples of “goals” are: retirement, college, buying a house, taking a vacation, and buying a car.

In writing down your goals there are a few pieces of information you must identify. You must know following about each goal: name (NAME), time until realization (TIME), cost in today’s prices (COST), planned contributions (PAYMENT), and current money saved for this goal (PV). Below is an example of a goals list:

NAME - TIME - COST - PAYMENT - PV - RATE Retirement - 30 years - $2,500,000 - $1,000 monthly - $350,000 - ??? College for Kid 1 - 12 years - $100,000 - $500 monthly - $20,000 - ??? College for Kid 2 - 10 years - $100,000 - $500 monthly - $22,000 - ??? Buying a Boat - 6 years - $30,000 - $150 monthly - $0 - ???

When developing a plan for your finances, toughest question often is: “Where do I begin?” Before investing in stocks and bonds or buying life insurance, before implementing any change or making any decisions, you first need to analyze and understand your entire financial picture. Two documents allow you to do just that. A Balance Sheet and a Cash Flow Statement enable you to take an in-depth look at your current financial situation and make better decisions about future. With a little work, you can develop these two tools and be on your way to a solid plan for your finances.

Balance Sheet A balance sheet is a snapshot of your personal finances at one point in time. It contains two main elements: what you own (assets), and what you owe (liabilities). Your net worth is expressed as: Net Worth = Assets – Liabilities. That is, what you own minus what you owe.

A balance sheet clearly lists all assets and liabilities. Examples of assets include: house, investments such as stocks and bonds, savings and checking accounts, 401(k), IRAs, business interests, artwork, and jewelry, among others. Liabilities include mortgage balances, credit cards, education loans, and any other debt. Once you have created a list of everything you own and everything you owe, simply subtract sum of assets from sum of liabilities- this is your net worth.

The ultimate goal of most investors is to increase their net worth. The balance sheet is a very useful tool to identify strengths and weaknesses in your current finances, as well as to determine your goals for future. Someone with a disproportionate amount of liabilities might set a goal to eliminate this debt. On other hand, someone with a positive net worth (more assets than liabilities) might plan to save and invest towards retirement, college, or another goal.