Back to Basics – Financial Planning

Financial planning is a basic foundation of personal finance management (PFM). This topic is in continuation of last week’s discussion – Back to Basics. Many of already have our financial plans which we have repeatedly said in this column should have been subjected to reviews due to the current economic upheavals. However, some of our readers do not have such plans. In every important aspect of life, we should have a game plan that outlines what needs to be done, how, when and by whom. Otherwise, we would not get optimum results. Financial planning is the process of controlling and channeling our financial resources to improve our living standards and meet life goals. Financial planning gets one prepared for life’s events financially. A financial plan outlines our goals, fixes a timeline to their achievement, and identifies appropriate investment options. Plans should be written, to help us articulate the route to our desired future, then identify and proactively mitigate the inherent risks.

The basic steps in financial planning include defining your financial goals, analyzing your current financial position, creating a spending budget, developing a SMART (specific, measurable, achievable, realistic, time-bound/ threats mitigated) plan, following the plan, reviewing your progress periodically (and during times of changes in your financial condition) and adjusting the plan as required.

Our financial goals could be in the form of assets (both personal use and investment assets) to be acquired or investment portfolio size. It is important to differentiate between personal use assets and investment assets. Although both contribute to personal wealth, if the asset does not generate a stream of revenue, it is not an investment. So, your residence is a personal use asset, whilst a build-to-rent property is an investment asset. The former does not generate revenue, in fact, you spend heavily on maintaining it, whilst the latter should return a positive cash flow – rent income should be higher than maintenance costs. Financial goals should include both personal use and investment assets.

The next step of creating a spending budget can only be done accurately after a comprehensive analysis of current financial conditions. Budgeting is a key component of financial planning as it ensures the prudent disbursement of financial resources. All incomes and expenses must be calculated correctly, so that an accurate budget can be developed. It is the surplus of revenue over expenses (disposable income) that are available for investment. If financial obligations are incompletely represented in the budget, then the disposable income would fall short of the expected figure, leading to insufficient funds for planned investments – a sure source of frustration and even surrender. With correctly prepared budgets, we still have to struggle with financial indiscipline, spontaneous spending, and financial emergencies. Therefore, ensure that you do not compound issues with inaccurate budgeting. A good budget should identify and block sources of financial leakages, discourage unplanned, impulsive frivolous spending and channel our finances to create the financial future we desire.

The budget is not the financial plan. Once we have our financial goals and we know how much disposable income we have, we need to determine how to use the latter to achieve the former. Focusing on investment assets; we must choose the assets carefully, considering on risk appetite, yield expectations, age, assets tenure, asset liquidity, ethical considerations, and personal preferences/ ability to manage the asset. Planning involves identifying the assets to invest in, determining how long it would take to accumulate the purchase prices (this is a multiple or fraction of your disposable income), establishing the processes for savings/ accumulation, arranging how today for the assets, and setting up portfolio management procedures. To achieve the plans, we need several partners: bankers- for savings accounts during fund accumulation phase; investment brokers – real estate agent or stockbroker, to facilitate and advise on transactions; investment manager – if we choose managed assets like mutual funds or commercial real estate and insurance underwriters – to provide protection against financial losses that could slow or even derail our plans.

All these budgeting and planning can be done by a PFM app (except the initial collection of data on income and expenses), so consider using a PFM app. However, you could also employ the services of a Certified Financial Planner who would help develop a plan that suits your individual peculiarities.

The benefits of personal financial planning include generating pools of money for investment, charting a clear path to a desired financial future, proactively managing financial risks, and preparing for a comfortable retirement.

Let us create the future we desire with effective financial planning, risks management and of course, God’s mercy. Happy investing.

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