1. Overview of Financial Planning

Learning Objectives

  1. Define the financial planning process.
  2. Distinguish between checking and savings accounts.
  3. Characterize effective goals and differentiate goals in terms of timing.

What Is Financial Planning To You?

What Is Financial Planning?

Do you want to buy a new iPhone, a new car, or your own house? Do you want to begin reducing your debt instead of increasing it? Do you want to keep growing your wealth? If you answered yes to even one of these questions, financial planning could be the answer! Whatever your goals, life is complicated and risky, and having a well-developed financial plan increases the odds of achieving your goals.

Financial Planning Defined

The idea of financial planning is really no different from the idea of planning most anything. It is an ongoing process that looks at your current financial situation and creates strategies to reach your financial goals.

Financial planning often delves into multiple areas of finance, including investing, taxes, savings, retirement, real estate, insurance, and more. A financial plan has to be re-evaluated, adjusted, and re-adjusted. The earlier you start, the better off you will be!

Factors Affecting Financial Planning

There are many factors that can affect financial planning. These factors can range from what can be considered small (micro factors) to relatively large (macro factors).

Micro Factor Macro Factor
Family Structure Business Cycles
Health Labor Market
Age/Life Stage Currency Value
Career Choice Other economic performance indicators

How You Benefit From Financial Planning

Financial planning can:

  • Prevent devastating mistakes (e.g., poor credit, bankruptcy, housing foreclosure)
  • Prepare you for emergencies
  • Help you to be financially secure later in life

Six Steps To the Financial Planning Process

There are six essential steps to the financial planning process:

  1. Define goals
  2. Assess your current situation
  3. Identify and evaluate plans that could achieve your goals
  4. Select and implement the best plan
  5. Evaluate your financial plan
  6. Revise your financial plan (annually)

Step 1: Define Goals

Define by timing of goals:

  1. Short-term (1–2 years)
  2. Intermediate (2–10 years)
  3. Long-term (beyond 10 years)

Create a S.M.A.R.T. Goal: A truly useful goal must be Specific, Measurable, Attainable, Relevant, and Time-bound

S.M.A.R.T. Goal Example

Step 2: Assess Your Current Situation

Questions for you to consider:

  1. Are you a big spender or a big saver?
  2. Your saving accounts for what percentage of your after-tax income?

This formula helps you determine your after-income savings:


SavingAfter-tax income×100% 


  • Financial Statements
    • Describe an individual’s or family’s current financial condition
  • Balance Sheet (or Net Worth Statement)
    • Net Worth = Assets − Liabilities
  • Assets: What you own
    • Definition: Any items with economic value that can be converted to cash (e.g., car, shares of stock, cash deposits)
    • Assets may be used to store wealth, create income, and reduce future expenses.
  • Types of Assets
    • Liquid assets are financial assets that can be easily sold without a loss in value.
    • Household assets are items normally owned by a household, such as a home, a car, and furniture.
    • Financial assets (i.e., investment), such as bonds, stocks, mutual funds, and real estate
Table 1: Assets and the Role of Assets
Personal Finance by Saylor Academy | CC BY-NC-SA 4.0
Asset Reduce Expenses Increase Income Store Wealth
Car Yes No No
Savings Account No Yes Yes
Money Market Account No Yes Yes
Home Yes No Yes
Rental Property No Yes Yes
Investment in Bonds No Yes Yes
Investment in Stocks No Yes Yes
  • Liabilities: What you owe
    • Definition: Debts a person owes to someone else (e.g., student loans, credit card balance, car loan)
    • Types:
      • Short-term (or current) liabilities: Obligations to be paid off within one year
      • Long-term liabilities: Obligations that will be paid off over a period longer than one year

How To Calculate Your Net Worth (as of today)[1]

Net Worth = What You Own − What You Owe
= Assets − Liabilities
Assets Liabilities
Asset Amount Liability Amount
House $315,000 Mortgage $285,000
Car $25,000 Car Loan $10,000
Checking Account $4,000 Credit Cards $2,000
TFSA $10,000 Student Loan $32,000
Total $354,000 Total $329,000
Net Worth = Assets − Liabilities
= $354,000 − $329,000

= $25,000

Watch the video[2] below to learn how to calculate your net worth. See Transcript if needed.

Positive Versus Negative Net Worth
  • Positive net worth:
    • When assets > liabilities, net worth > 0.
    • Keep doing what you are doing.
    • Do not forget that a person’s net worth fluctuates.
  • Negative net worth:
    • When assets < liabilities, net worth < 0.
    • It is a sign that you need to increase your net worth.
    • Strategies:
      • Increase assets
      • Decrease debt
      • Or both

Time to Practice: Calculating Net Worth

Steps 3, 4, 5 and 6 of the Financial Planning Process

Step 3: Identify and evaluate plans that could achieve your goals

  • How can you obtain the necessary funds to achieve your financial goals?
  • Will you need to reduce your spending to save more money each month?
  • Will you need to make investments that generate a higher rate of return?

Step 4: Select and implement the best plan

  • What are the advantages and disadvantages of each alternative plan that could be used to achieve your goals?

Step 5: Evaluate your financial plan

  • Is your financial plan working properly?
  • That is, will it enable you to achieve your financial goals?

Step 6: Revise your financial plan

  • Have your financial goals changed?
  • Should parts of your financial plan be revised to achieve your financial goals? If so, how?

Basic Tools in Finance: Cash Flow

Basic Tools of Finance: Cash Flow Statement

What is a Cash Flow Statement?
  • Cash flow statements are used to analyze cash flow.
  • The cash flow statement shows how much cash came in, where it came from, how much cash went out, and where it went over a given period of time.

Cash Flow Statement—Example 1

Table 2: Personal Cash Flow Statement with Gross Wages

Net cash flow  –  $9,270
Cash Inflows
Cash from gross wages $40,000
Cash Exflows (cash paid for)
Income tax and deductions  –  $6,100
Rent expenses  –  $14,400
Food  –  $5,260
Car expenses  –  $5,520
Clothing  –  $1,800
Cell phone  –  $1,340
Internet and Cable TV  –  $1,160
Entertainment, travel, etc.  –  $3,450
Car loan  –  $4,200
Student loan  –  $6,040

Cash Flow Statement—Example 2

Table 3A: Cash Inflows Statement (For One Month)

Total Cash Inflows $2,500
Cash Inflows Last Month
Disposable (after-tax) income $2,500
Interest on deposits
Dividend payments

Table 3B: Cash ExFlows Statement (For One Month)

Total Cash Exflows (Outflows) $2,200
Cash Exflows (Outflows) Last Month
Rent $600
Internet $50
Electricity and water $60
Cellular $60
Groceries $400
Health care insurance and expenses $130
Clothing $100
Car expenses (insurance, maintenance, and gas) $200
Recreation $600
Net Cash Flows  =  + $300

Time to Practice: Creating a Cash Flow Statement

Basic Tools in Finance: Checking Accounts

How Do Checking Accounts Work?

When you open a checking account, you will typically receive a debit card.

Step 1

Open a checking account at a bank or credit union. When you open a checking account, you will typically receive a debit card. 

What is a Debit Card?
Debit card image
Image by Mudassar Iqbal from Pixabay

Debit Cards:

  • provide the cardholder electronic access to their bank account(s) at a financial institution.
  • are also known as bank cards, ATM cards, cash cards, and check cards.
  • deduct money directly from your checking account to pay for a purchase.
  • can be used to withdraw cash through an ATM or through the cash-back function that many merchants offer.
Why Use Debit Cards?

Convenience—debit cards are often accepted as a form of payment anywhere credit cards are accepted.

Are There Limitations with Debit Cards?

Debit cards usually have daily purchase limits.

You cannot make an especially large purchase with a debit card.

Step 2

Deposit funds into the account with cash or a check.

  • Your money is protected.
  • Money in a checking account is typically insured for up to $250,000 by the Federal Deposit Insurance Corp (FDIC).
  • That means if you have less than that amount and your bank fails, your money will be safe. Any amount over the FDIC limit is at risk.

Step 3

Access your funds when you need them.

  • Funds you deposited in the checking account will then be available to access and use.
  • For example, you can use the funds to pay bills online.

Getting to Know Your Account and What It Offers

  1. Do you have a checking account? If you don’t, consider opening one today.
  2. If you do, does your bank offer online banking services, such as electronic bill payment? Visit your bank’s website to learn more.
    • What products and services does your bank offer?
    • Do you (or would you) use those products and services? Why (or why not)?
    • What are the main benefits and risks of online banking?

Basic Tools in Finance: Savings Accounts

What Is A Savings Account?

  • A savings account is an interest-bearing deposit account designed to hold money you don’t plan to spend immediately.
    • Savings accounts pay interest. (The interest you earn on a savings account is considered taxable income.)
    • Savings accounts have some limitations on how often you can withdraw funds.
    • Savings accounts are safe.
  • Savings accounts help you store money for specific purposes.
    • For example, you may open a savings account to hold your emergency fund or a down payment on a car.
  • Your money is protected.
    • Money in a savings account is also insured for up to $250,000 by the Federal Deposit Insurance Corp (FDIC).

How Do Savings Accounts Work?

  1. Open a savings account at a bank or credit union.
  2. Deposit money into your savings account.
  3. The bank then pays you interest on your balance.
    1. You can continue adding money to your savings account.

Watch this 2-minute video[3] for additional information on checking and savings accounts.

Seek Expert Financial Advice

People often find it helpful to obtain the services of more broadly qualified financial experts.

A financial planner is an investment professional who evaluates the personal finances of an individual or family and recommends strategies to set and achieve long-term financial goals.

The most recognized professional designation for financial planners is the Certified Financial Planner.

Some of the best apps are:

Key Takeaways

  1. A personal balance sheet summarizes your assets (what you own) and liabilities (what you owe) in order to calculate your net worth.


    Net Worth=What You OwnWhat You Owe=AssetsLiabilities 

  2. A personal cash flow statement measures your cash inflows (money you received) and your cash outflows (money you spent) to determine if you have a positive or negative net cash flow.


    Net cash flow=Cash inflowCash outflows 

  3. Net cash flows can be used to decrease liabilities, which will increase net worth.
  4. Checking account: No interest, money for immediate use
  5. Savings account: Low interest, money for short-term use

Revisiting Your Definition of Financial Planning


This chapter contains content from the following sources:

“The Math of Money” by J. Zachary Klingensmith, accessed on the OER Commons, is licensed  CC BY-NC-SA 4.0

Personal Finance was adapted by Saylor Academy under a CC BY-NC-SA 3.0 without attribution as requested by the work’s original creator or licensor.

Further Reading

Campbell, J. (2022, February 14). How to create a personal balance sheet and determine net worth. Money Management International. https://www.moneymanagement.org/blog/how-to-create-a-personal-balance-sheet-and-determine-your-net-worth 

Frankenfield, J. (2023, May 27). What is a checking account? Here’s everything you need to know. Investopedia.com. https://www.investopedia.com/terms/c/checkingaccount.asp

Herrity, J. (2023, June 6). Guide on how to write SMART goals (with examples). Indeed.com. https://www.indeed.com/career-advice/career-development/how-to-write-smart-goals

Manning, L. (2023, February 15). Financial plans: Meaning, purpose, and key components. Investopedia. https://www.investopedia.com/terms/f/financial_plan.asp#:~:text=A%20financial%20plan%20documents%20an,plan%20for%20saving%20and%20investing

  1. Banerjee, P. (2015, June 18). How to calculate your net worth [Video]. YouTube. https://www.youtube.com/watch?v=KhSnNtdYR9Y
  2. One minute economics. (2016, June 18). Learn how to calculate your net worth in one minute [Video]. YouTube. https://www.youtube.com/watch?v=UipPLoWZVpI
  3. MoneyCoach (2016, July 16). Checking and savings 101 [Video]. YouTube. https://www.youtube.com/watch?v=ku52Pb7fFT8


Icon for the Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License

Financial Literacy Copyright © by Florida State College at Jacksonville is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

Share This Book