A financial plan is like “the anchor in life’s ocean” – to use the words of the famous song. It will help us build up our incomes, manage our expenses, ensure our lodging, finance our tuition, help us with the car, the taxes, the wedding, and eventually – with our retirement.
Sure, we could live without it (as some folks do), but life will be more hazardous, full of financial surprises, difficulties in buying (or leasing) the things we want, altogether – lacking the necessary degree of financial safety for which we all aspire.
Knowing that financial planning is important, how do we go about it?
Here are the 7 tips which will help with your financial plan and ensure your financial wellbeing:
1. Start With Your Budget
As we are talking finance, your budget will provide a reasonable stepping stone for all of the financial planning. The budget is technically an income and expense balance – your income must facilitate your spending (we are not considering borrowing yet) and savings.
Normally personal financial planning will start from developing a personal (or family) budget. This will include how much you earn and how much you need to spend and save. Starting with a weekly or a monthly budget is great, as the shorter term will make it easy not to overlook some necessary expenses.
Building a budget will need you to balance your needs, wants, and goals. The “needs” are expenses which you cannot do without (food, rent, transport). The “wants” are usually fun stuff (restaurants, fashion, recreation).
The “goals” will be your savings as described below. A rule of thumb is the 50/30/20 principle for balancing your spending – 50% for needs, 30% for wants, and 20% for your goals. Make a careful consideration of what fits where, and of course – do you really need it.
Just remember: budgets are not carved in stone. As time goes by you may refine it. Some incomes may change and certain expenses may need to be scrapped, while yet others will be added to your budget. Keep it alive and functional, not a dogma.
Your Budget actually is a representation of your financial condition.
2. Determine Your Goals?
Old people say “You can’t get there if you don’t know where you are going.” Depending on the stage of life you are in, your goals will be different. They may be going to college, or buying a house, or traveling around the globe. Your goals will have their financial expression. Whatever they are, after careful consideration, write them down. Now you are ready to start work on achieving your goals.
Having established your goals, you may revisit your budget. Is the 20% allocated to “goals” enough? Now you may consider decreasing some expenses (usually we start with the “wants”) and providing some additional resources for achieving your goals. This is a back-and-forth process, where you will have to balance your income, expenses, and goal financial requirements.
This is the best part which is both fun to consider and will also later motivate you. Consider how you want your life to be in 10 or 20 years and get to work.
3. Debt Considerations
However modest you are in your goals, most people also need the support of debt. Debt will help you reach your goals earlier than if you only depend on savings. However, debt needs to be serviced and repaid and these will have to go in your expense-side budget.
Hence it is important before jumping into debt to carefully consider the implications of these obligations for our future and our budget – Can we afford this new expense? Will we have to scrap something else?
Debt (contrary to what some people think) is not a bad word. All that is necessary is careful consideration before signing the debt contract. Seeking advice from your financial planner is again highly advisable.
4. Capital Management
As you save from prudent budgeting, you will be able to amass some free money. It is not actually “free” – you have worked hard for it. Rather it is idle and waiting for you to do something with it. This is the point when free money can become capital. Else said the money can start working for you and generate its own income.
You may be a student of economics and have some idea how to do that, but hiring some financial advisors or striking up a relationship with a wealth management companywill also be a good idea. What they will do is help you manage the collected savings, support your tax planning and eventually increase your wealth.
This increased income (the one your capital generates for you) will be channelled into your budget. Revisit it and make the entry. This is the reason why many people actually have “capital generation” and “investing” as one of their goals. Manage your capital wisely and increase your income. This will allow you to also aim higher with your goals.
5. Asset Management
This may sound complicated, but it is not. The idea is to manage, or initially prepare, for the purchases (or lease) of some of the bigger assets which a person (or a family) will like to enjoy. Such is the house you live in, the car you drive, and all of the more expensive assets you will need.
By planning for these substantial expenses you will be able to choose the best solution for you, make the least expenses, manage the taxes and other additional add-ons associated with the asset, consider its residual value and eventual sale down the line, and most of all – enjoy the asset of our choice.
Again we can do this ourselves or hire a local financial adviser or specialised estate planner.
6. Super Management
Irrespective of how young we are today, one thing is certain – we will get old. It is a good idea to start preparing for that time as early as possible and engage in superannuation management. The idea behind the super management is to ascertain that when your income decreases or stops altogether, your standard of living will not suffer.
Here you will need to answer some important questions – when do you plan to retire and what do you plan to do upon retirement? Preparing for retirement will increase your expenses today, but it will provide you with calm years upon retirement.
Again some folks will jump in self-managed superannuation.And again most of us will employ a superannuation professional for helping us plan better.
7. Protection Management
Protection is an important part of your personal financial planning. It is usually achieved with some sort of insurance coverage. This could be protection for your home, your car, your life, your health. You may even insure against loss of income.
As the products are so many, and some of them may be more complicated than others, it is truly advisable to use the help of a licensed insurance broker.
What Will It Do For Me?
The easy-to-see benefit is that you will be able to achieve your goals. Just this is a lot. But financial planning will also provide you with security, peace of mind and ensure your wellbeing. Is this not something for which we all aspire? … whether we realise it or not.
Well, you have both the material and the spiritual benefits. What more can one want?
Just start your plan.