Make a Financial Plan

Make a Financial Plan

Make a Financial Plan

Most people want to have a nice home, put their kids to good schools, have the things they need, and live well in retirement. A comfortable lifestyle, however, does not just happen overnight, unless you win the lotto jackpot.

It takes foresight and planning, which has to start now. Have a financial road map to get you from where you are right now to where you want to be in 1, 5, 10, 30 years or more.

What is a financial plan?
According to the book The Citibank Guide to Building Personal Wealth, “A financial plan is not a prediction of the future but a tool to help you in attaining what you want in life.”

"A well thought out financial plan can get you from where you are now to where you want to be."
"A well thought out financial plan can get you from where you are now to where you want to be."

It includes your realistic and achievable targets, taking into consideration your earnings potential, lifestyle expenses, and your tolerance for investment risks. Although a financial planner or investment adviser can make a financial plan for you, you can map out your own plan.

7 steps to make it happen

  • Have a realistic picture of your financial situation. Compute your net worth (total assets less total liabilities) to see where you stand on the financial front. This will let you see if you have enough assets to cover your liabilities, or need to be more disciplined in money management to increase your assets (e.g., savings) and decrease your liabilities (e.g., pay off debt). Make your own income statement too — identifying your income sources and expenses to help you determine where you can further cut costs.
  • Make a wish list of the goals you have that involve money. Include short-term, medium-term and long-term goals, even those that seem hard to attain. A short-term goal may be to pay off credit card debt in a year’s time or take a vacation in Hong Kong this Christmas; a medium-term goal may be to buy a car; and a long-term goal may be to retire at age 50.

    To help you out in listing your goals, consider these:
    • marriage plans or plans to start a family
    • whether or not your parents need financial support from you
    • whether or not you want to buy your own home or have a bigger home in the future
    • whether or not you want to have time off from work to pursue graduate studies
    • plans to buy a car, and if so, by cash or mortgage
    • plans to acquire assets such as art
    • plans to have plastic surgery
    • hobbies and how to finance them
    • vacation plans
    • plans to join a country club
    • plans to pay off debts
    • age at which you want to retire and where you want to retire
    • amount of money, in today’s values, you want to live on when you retire
    • amount of money you need to live on if you stopped working tomorrow
    • amount of money you need to live on if you lost your job and are out of work for a year
    • amount of money you need to live on if you become sick or disabled
    • amount of money you would like to leave your family after your death
    • amount of money your family needs to live if you die suddenly
    • price of college education for your children
  • Assign a monetary value to each goal in today’s money. You may need to do additional research, especially if you desire to retire in another country. You’ll have to find out the cost of a home there, as well as living expenses. Assigning a monetary value to your goals will help you see how reachable they are.
  • Prioritize your goals, ignoring their cost and time frame. Which ones are important to you? You can group your goals into Essential, Desirable, or Nice But Not Very Important.
  • Add up the cost of all your goals. You are in very good financial shape (and in the minority!) if you can afford all your goals given your current assets and income. If this is not the case, you are not alone. Scale down your goals and be more realistic. But keep your list since this may be helpful to you in the future when you have built up your wealth.
  • Rethink your financial moves. Make plans to save more and invest money at a better return to enable you to reach your goals. If, for instance, your investment in time deposits is not enough to cover your children’s college tuition, look into going into investments that may yield a better return, such as mutual funds, stocks, or government securities. This is a good time to seek out a financial adviser who can help identify for you the investment options available. An adviser can also help you determine how much you need to save at a given return so you can attain your medium-term and long-term goals.
  • Monitor your progress. Times change, and so do your earnings, expenditures, needs and wants, and investment returns. Make it a habit to prepare regularly your personal income statement and a summary of the progress of your investment portfolio. See if you need to adjust somewhere by cutting down on unnecessary expenses, or foregoing an unnecessary goal, or increasing the amount of money you save and invest. Be disciplined yet flexible. For instance, if you have saved up enough substantial cash in your savings account, move some of it into a higher-yielding investment instrument. Revise your financial plan, too, if unexpected life changes occur, such as a new job opportunity that opens up for you in a foreign land.
Just as a road map can take you from point A to point B, a well-thought out financial plan can get you from where you are now to where you want to be in the future.

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