Financial planning is a continuous process that aims to help people make sensible decisions about their money, to ensure they achieve their life goals. A financial plan, generally, provides a roadmap for achieving your life goals in a systematic and strategic manner, with or without roadblocks along the way.
Financial management need not be a dull and challenging activity. No rocket science is involved, and you don’t need to have a financial background to make it work for you. You only need goals and a commitment to these goals. The first step in financial management is the choice to start saving. Imagine a scenario where you badly need money but don’t have any, what would you do? Borrow from a friend or swipe your plastic cards? Whichever option you choose, you will go into debt, unless of course you had anticipated the challenge and saved up some emergency funds. Also, most of us have financial goals that we hope to achieve, such as buying a house, saving up for college or even buying a car. All these goals need money to be completed and where does this money come from? Savings!
So, financial planning is getting your financial house in order, to ensure that you achieve all the goals that you’ve set out. These can be anything from clearing your debt, to saving money, creating a budget, investing for retirement, planning for college, or saving for a new house.
If we could achieve our financial goals simply by putting money in a bank, financial plans wouldn’t be a necessity. However, due to the intricate nature of life, nothing is ever that simple. But the trick to financial planning is to ensure that you save at least 10% of your salary every month. Seems simple, right? Here’s the tricky part, don’t keep the money in a piggy bank or a savings bank account. Save on a monthly basis and be amazed at the outcome!
If you find yourself struggling for money before the month ends, especially if you are living paycheck to paycheck, then you are living beyond your means. Yes, we live in an easy, instant gratification, consumer spending driven world and are bound to get a lot of unplanned expenses. These might be the reason why you keep lacking money for necessities before the month ends. But the good thing is that you can get yourself out of this financial mess by making a budget. Unless you have a well-thought-out budget, you will not be in a position to balance your income against your expenses. A budget will help you figure out how much money is coming in and where these funds go.
The best way to create a budget is to start by categorizing your expenses into either:
This enables you to create a hierarchy of needs or wants and helps you sort out the necessary ones first. Generally, to make financial planning a success, you need to realize that you have limited resources and unlimited wants, therefore, prioritizing will play a significant role. Alternatively, you can opt to use budgeting apps such as Mint or Mvelopes. Then, once you’ve allocated money to all the necessary expenses, you can consider including expenses such as leisure and entertainment. Be committed to your budget, look at it as your ticket to financial freedom.
Creating a personal balance sheet will enable you to know the money being brought in versus the money going out, or better yet—what you own versus what you owe. This is a great way to determine your net worth since it outlines your assets and liabilities.
When creating a personal sheet, start by collecting your bank statements and other proofs of liabilities. Then create a list of your assets such as your bank balance, investments, home value, among other assets, and tally the values. Do the same for your liabilities, such as loans and credit card balances, and total to get the value of how much money you owe. Subtracting the value of your liabilities from your assets gives you your net worth. Ideally, the money you own should be higher than the money you owe.
So, how do you deal with surplus cash? Do you have a plan? If not, you are likely to indulge in overspending rather than using the money to improve your financial sufficiency. With the increasing yearly rate of inflation, everything tends to cost more. And without an investment plan, your cash won’t be able to bridge the inflation gap. Therefore, investing is a great way to channel surplus cash, counter inflation as well as grow your wealth.
However, don’t invest blindly. Start by identifying a goal such as planning for retirement or planning for your kids’ college tuition. Categorize these goals into either short or long term goals and ensure they are specific and time-bound.
Creating an investment portfolio is all about asset allocation. Generally, this means distributing your investment among asset classes such as equity, debt, and cash. While it is advisable to go for equity due to its tax-efficiency and inflation countering vehicle, this wouldn’t be wise. It would be wiser to diversify your funds that are assigned to each asset class with regards to your investment goals. Once you have come up with your investment portfolio, consider reviewing it on a periodic basis to ensure you are on par with market fluctuations.
Planning for retirement is now more significant than a decade ago. With increased life expectancy and owing to a sedentary lifestyle, we are more susceptible to a myriad of ailments, which means the cost of healthcare is increasing. This is just one among the many scenarios. Don’t postpone your retirement planning. Consider the fact that the sooner you start planning, the sooner, or richer, you will retire. When it comes to retiring you have to determine the age at which you want to retire together with an approximate value of how much you’ll need on a monthly basis to sort out your expenses.
Debt management is the key to financial planning. If you are not careful, you may end up borrowing more to offset previous loans which means your financial goals will have to be delayed. However, coming up with an effective strategy to pay your debts will prevent you from facing such challenges.
Financial planning is all about risk management. You need to recognize the fact that your life and property are all at risk, risks which can jeopardize your finances. While you may have an investment plan, it is not the same thing as having an insurance plan. Consider obtaining term insurance policies which ensure that you have a higher risk coverage, and part with a reasonable amount regarding policy premiums. Typically, the sum assured of the insurance policy you take needs to be at minimum ten times your annual income, and other than just life insurance you may need to get health insurance as well.
All your assets constitute an estate, from your car, home, to money in your savings account. And it is your responsibility to determine what happens to your assets once you leave this world. You need to plan and ensure that each asset is legally allocated to the right person.
Planning your estate or writing your will isn’t a privilege for the wealthy only. In reality, if you don’t want your assets to fall into the wrong hands, it’s essential to plan your estate as soon as you can. All you need to do is create a list of the assets you own and a list of beneficiaries, and determine the proportion of your assets that you want to allocate to each. Then make a will to ensure all the recipients receive their portion of your assets. It’s advisable to consult with a lawyer.
Tax planning generally helps you analyze your finances and determine ways in which you can optimize these. It allows you to take advantage of tax exemptions, deductions, and benefits with the aim of reducing your tax liability at the end of each financial year. While tax planning is legitimate, ensure you don’t indulge in tax evasion or tax avoidance.
Financial planning is essential in this economy and not just for the wealthy but for everyone who has financial goals. And the best thing about it is the fact that there are financial planners to help you decide on the investments or savings plans that best suit your needs.
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Very good idea and would like to hear more of that
By Joseph Napare (Nov, 2021) |
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Well articulated, elaborated post. Your article covers all aspects of comprehensive financial planning and related aspects. Thanks for sharing.
By Prashant Chitnis (Dec, 2022) |