A plan turns meaningful goals and objectives in your life into smaller, more manageable pieces. A plan gives you more control over the direction your life takes. It gives you a basis from which you can evaluate all of your decision. It gives you a better chance of achieving happiness and personal fulfillment. Financial planning is the holistic process of coordinating cash management, tax planning, insurance, investment planning, retirement planning, and estate planning to most effectively accomplish a person’s financial goals.
In order to create a sensible financial plan, you must understand what money means to you, what values it can help you achieve. To put it another way, the process is basically a matter of looking deeply at what is most important to you, and then planning your finances around that. The point is that smart financial planning is more than a matter of numbers. It involves values first, and stuff second. Let us say you value security, but you’re constantly spending more than what you make. As a result, you are living paycheck to paycheck. In other words, you are living your life in massive conflict with your value, which creates massive stress. Your financial behavior simply doesn’t match your personal value.
The steps in creating a comprehensive and effective financial plan are:
- Set financial goals. A financial goal should be specific, measurable, achievable, realistic, and time-bound. Write down your goals, prioritize, and classify into short, medium and long-term goals.
- Assess your financial condition. Getting organized is the first thing you need to do when you decide to get serious about financial planning. There are three things you need to determine to know where you stand financially: the things you own (assets); the things you owe (liabilities); and your net worth, which the difference between your assets and liabilities and also called the true measure of wealth.
- Create a Budget Plan. A budget or spending plan will help you control and manage your expenses. The first item in your budget should be the amount of your monthly savings – 10-20% of your income. Your budget plan will also include a budget for debt payment, housing expenses, food and groceries, utilities, school-related expenses, transportation, clothes, vacation & recreation, among others.
- Manage your debt. Paying off debts should be one of your top priorities. Make a list of all your debts, including how much you need to pay monthly and the due date. Prioritize paying debt with the higher interest and just pay the minimum for the rest.
- Get Insurance Protection. A life insurance is necessary if people depend on you financially. It will help them continue to live comfortably even when you are no longer around. You also need to get health insurance to cover medical expenses in case you and any member of the family become ill or injured. If you own a home you also have it insured.
There are specific financial plans, such as:
- Children’s Education. If you have children, it’s a must that you prepare for their education well in advance. Consider buying an educational plan for your children from pre-need companies or life insurance firms or save money for their education and invest on your own.
- Retirement Plan. Retirement planning, which should be started as early as possible, will include deciding on retirement age, determining your future needs and savings/investing to accumulate required funds, among others. Government statistics show that 75% of senior citizens are poor and another 15% are just meeting basic needs. Only 1 in 10 seniors is living comfortably because a vast majority failed to plan adequately. You can’t just rely on government pension and to give you old age support from your children.
- Investment Plan. Keeping your money at home or in saving account will lead to a steady decrease in your purchasing power because you will not be able to keep up with the effects of inflation. Consider investing regularly in a long-term time deposit accounts, mutual funds and UITFs, government securities, stocks, real estate or in a business venture.
- Estate Planning. It is essential for the proper and orderly disposal of your assets upon death. In simple terms, estate planning involves how you want your estate, which includes all real estate properties, cars, jewelry, cash, investments and other assets that you own, to be distributed after you die. Basically, it identifies, through a will, who gets what. It is a complex process and requires legal documentation. It is best that you consult with a lawyer.