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“Always plan ahead. It wasn’t raining when Noah built the ark.” – Richard Cushing
What if I just buy a house instead of renting? At what age do I plan to retire? Can I afford a vacation abroad? You may find yourself asking these questions when thinking about your financial goals. You want to achieve financial success, and what you need is a solid financial plan.
Your spending and saving habits today can greatly affect your financial status over the long term. Thus, having a financial plan can guide you on how to organize your personal financial matters. But don’t worry, my dear reader, the concept of financial planning is simplified in this article.
The process of financial planning involves the process of maximizing your assets to help you meet your current needs as well as help you achieve personal goals such as purchasing a house, and/or accumulating wealth for your retirement. This is not just for the wealthy. If you earn and spend money, having a financial plan can be of great help.
The Financial Planning process is briefly described below:
1. Know your situation
This involves listing all the assets you own, debts you owe, sources of income, savings, investments, and expenses. It is also important to factor in personal circumstances that may impact your financial standing
Helpful tip: Calculate your net worth. Do this by subtracting all your liabilities from your assets. This serves as your benchmark when you measure your pace towards achieving your goals.
2. Set your financial goals
Goals you set must be specific, measurable, achievable, realistic, and time-bound (be S.M.A.R.T.!). If you set your goals too high, you might find it hard to reach them and give up eventually. If you set your goals too low, you may not push yourself to reach your maximum potential.
Helpful tip: Categorize your goals as either short-term, medium-term, and long-term. You can prioritize your goals with the help of these categories.
3. Create a financial plan
Find out how much you can save to achieve your financial goal. There are various personal finance “rules of thumb” like: how much you should be saving at age 65, whether you should buy your dream car or a second-hand one. If you think you are saving too little, it may be beneficial for you to carry around a small notebook and list down the things that you bought and how much it cost, just to see where your money is going.
Helpful tip: Get to know how you spend your income after you receive it. Carefully track your expenses to have a sense of where your money goes and how much you have left for saving. A useful tool would be budgeting apps which I’ve covered in a previous article.
4. Execute the plan
Once you have your plan ready, act on it earnestly. If your plan says, “save up to 10% of your monthly salary”, or “pay off a loan in 3 months”, then make sure you commit to it. Formulate a budget that fits into your financial plan. It also helps to cut back on your expenses if you find some of them excessive. Adjust your lifestyle according to your level of income. Save your money first, then spend only on necessary expenses. Pay your bills on time. What’s left of it can be spent on your wants.
Helpful tip: At first, you may find it hard to commit to the savings rate you had set in your plan. Start small first, save as much as you can, then slowly work out your way to your desired savings rate.
5. Review, monitor and reassess
Your situation might have changed since you first laid out your financial plan. Financial plans should be tweaked according to the changes in your circumstances. Consider also changes that are beyond your control, such as tax rates, inflation rates, and other economic factors.
Helpful tip: Celebrate milestones such as completing a short-term goal or paying off debt. This can motivate you to reach your long-term goals.
In life, there are always surprises, both positive and negative. Some of them may have an impact on your financial well-being. Dealing with these changes might seem overwhelming to you, that is why it is important to have a financial plan. It gives you a sense of direction, and action steps to incorporate these changes to support you in reaching your goals and dreams.
Preparing a financial plan takes time and dedication. The process mentioned above is just a brief introduction to financial planning and shouldn’t be taken as financial advice. For guidance on your specific situation, don’t be afraid to talk to a Registered Financial Consultant. If you want to find one in your area, please click here and do a quick search.
Disclaimer: Just a reminder, dear reader, that the content in this column is my opinion only and should not be construed as investment advice because I am not your financial adviser, neither did I take into consideration your personal objectives, financial situation, needs or circumstances as your fiduciary. This column is mainly for your entertainment and education only.