Introduction to Financial Planning

What is financial planning?

Financial planning is a process to achieve your life’s goals or objectives through the allocation of your financial resources (example: cash in your bank and/or assets such as property). It need not be an arduous process, instead you could take your time, review your dreams and find ways to attain it! I have 5 basic steps that I use when I meet my clients for financial planning. Let me share with you what these 5 steps are:

1. Identifying goals and objectives
What are your goals and objectives in life? This usually correlates to one’s life stages. If you are in your late 20s or early 30s and married, your top priority would normally be on insurance and planning for your children’s education and future.

If you are in your late 30s, you might start thinking about retirement planning. If you are in your 50s, then legacy planning and wealth distribution will be your top priority. It really depends on your area of need and importance of a particular goal.

2. Budgeting
Budgeting is about breaking down your income to identify sources of expenditure. For example what proportion of your money goes into entertainment, education, vacation, bills, insurance etc. It also enables you to identify what your fixed and variable expenses are.

3. Cash flow system
Through budgeting, you will be able to create a cash flow system for yourself. The goal is to have positive cash flow every month so that you are able to save. The flow would be as follows:

a) Income – Income received from employment.

b) “Pay yourself first” – “Pay yourself first” is a concept of putting aside a portion of your income before you consider any expenditure. Ideally, this amount should be deposited into a separate bank account and should not be easily accessible for you. For example, by choosing not to have ATM card access for this account, you will not be able to spend money from this account easily. This is your savings account.

c) Fixed expenses – These are expenses that you pay on a regular basis, such as bills, insurance premium, transport and income tax etc.

d) Variable expenses – after paying yourself and setting aside the fixed expenses, you can reward yourself with items such as dining in restaurant, taking a vacation, shopping for branded goods etc. It would be good if you can set aside a sum for variable expenses per month.

e) Surplus savings – if you have any surplus savings after going through steps (b) to (d), you are doing great! You can then channel the surplus savings into your saving account.

Now, try out using the above-mentioned method for 6 months. After 6 months, review how you have done. Example, John earn about $3,000 per month. He pay $800 to himself, fixed expenses of $1,500 and variable expenses of $700 per month (assuming no surplus savings). After 6 months, John should review whether he has $4,800 in his savings account. If he does not have, he will have to review what went wrong and moving forward how and what he could change in terms of budgeting to achieve his goal.

4. Construct and implement your plan to reach your objectives
Now that you know more about budgeting, let’s revisit your goals and objectives. Depending on your goals or objectives in life, you will need to strategize using various financial instruments available. For example, if your objective is insurance planning for future needs, then you would need to understand how each insurance instrument works (Example term vs wholelife insurance) and which is the best for you. Do speak to your financial advisor to find out more.

5. Review of your plan
I would encourage you to review your plan on a yearly basis to make sure that your plan is reaching your goals. For example, if you require a 7% return per annum to reach your target, review whether your plan is delivering such return? If not, why? If it does produce such return, what contributed to the success?

Next, review your cash flow to ensure that there is no idling cash in the bank as bank interest rate is 0.125% compared to inflation of about 3%. This yields a negative rate of 2.875% per annum. Now you wouldn’t want that would you?

Financial planning is not a get rich scheme. It is a journey where you make conscious effort to reach your financial goals by using your available financial resources. What you plan now, affects your future. Start today for tomorrow.