Back to Basics – Financial Sub-plans

In this last article in our Back to Basics series, we are discussing the various sub-plans that we must develop as we plan our financial future. These sub-plans mirror various aspects/ areas of our lives and should be carefully planned for, so they do negatively impact our financial well-being. Most financial plans focus solely on investment planning and management – identifying our sources of income, deriving the disposable income available for investment, and using the disposable income to purchase assets that deliver both revenue and capital gains that would grow the wealth of individuals. However, if these other sub-plans are not in place, they could reduce disposable income or even cause the premature selling of income generating assets – thus derailing our investment plans. For instance, if we do not have adequate insurance, accidents can lead to loss of a home or a car, and funds that should be used for investment would have to be diverted to purchasing replacements. Or if we do not have education plans in place, we may have to sell assets to give our children the quality of education we desire or else settle for something below a child’s potentials.

Examples of sub-plans are education, retirement, health, risks management, emergency, and estate (will and final testament) plans.

Many people can pay out of pocket for primary and secondary education but find university education particularly challenging especially when we are forced to choose private universities instead of public ones because of the frequent interruptions in the calendars of public universities. An Education Plan from an insurance, asset management or trust company enables the parent to save in small amounts monthly (or as you choose) over a long period of time towards the education of the child. The money is then paid when the child starts university and reduces the amount of money the parent parts with at that time. A plan from an insurance company has the added benefit of full payment in the event the parent dies before contribution to the plan is complete. An education plan not only provides financial freedom for the parents, but it also ensures that we do not need to liquidate assets or go a-borrowing in order finance our children’s education.

Retirement planning comes in two forms, opening a retirement savings account (RSA) with a pension fund administrator (PFA), and augmenting that with an individual investment plan. For many, the investment plan is also a retirement plan. But, if we do not want to sell assets and prefer to leave them to our heirs, we must have retirement assets that generate sufficient passive incomes to maintain our lifestyles and increased health expenses when we would not be earning active income. These assets should generate a continuous flow of revenue throughout the year.

We also need sufficient health insurance cover. Some of us enjoy this as part of our employment benefits, and others buy their own Health Plans; after doing thorough appraisals of what each package offers compared to the premium payable, the quality of hospitals covered, and the reliability of the Health Management Organization. Health issues have the greatest potential to derail financial plans – they may erode accumulated wealth and then go further to prevent the individual from working to generate more income.

We must also proactively manage our risks. Firstly, we must install structures to prevent negative events from occurring and secondly, we insure risks that have potentially high financial consequences. Insurance pay-outs prevent negative events from impeding our financial well-being and derailing our financial plans. We should also plan for those who are dependent on us financially through adequate life insurance policies, that would cushion the financial effects of the untimely exit of their “breadwinners”.

Since not all these risks can be prevented or insured, we must do some emergency planning through an emergency fund that we can draw on in a rainy day. An emergency fund must be easily accessible and should therefore be invested in cash and near-cash money market assets.

Finally, we must plan for our ultimate demise through estate planning. Estate planning is the efficient distribution of an individual’s property in line with that individual’s priorities and objectives. It puts one in control even after death, ensures correct and timely distribution of our properties, and gives tax planning advantages. For those of us with young dependents, timely distribution could determine if they get uninterrupted schooling. Remember to update your will whenever you acquire additional assets.

If properly developed and managed, all these different sub-plans would help to ensure that our main financial plans are not hijacked by life’s emergencies. Happy investing.

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