WHAT IS FINANCIAL PLANNING?
Financial planning is the process of setting, planning, achieving and reviewing your life goals through the proper management of your present and future finances.
A holistic financial plan involves investing money and building your wealth, credit and tax obligations, daily and future big spending involving home, education and family. These facets of financial plan are interconnected.
Financial planning is an important life skill to help you plan your future and take better control of financial goals by helping you to set realistic plans and take effective measures.
Prudent financial planning will help you to:
> Satisfy today’s financial needs - Can you balance your monthly expense? Do you often spend on credit cards? Create budget planner to plan and monitor savings and expenses.
> Meet future financial goals – What are your financial goals? Are these goals realistic under your financial position? Set savings goal calculator to help you plan ahead.
> Save for emergencies – Most don’t take a step back when everything is good and forget to realize if there’s enough financial cushions or contingency funds for living expenses to deal with any unexpected crisis.
> Protect you and your family in the event of something going wrong – Financial planning involves having the right insurance in place to protect you/dependents if something goes wrong with your health or with your property; and conducting estate arrangement.
> Plan for your retirement – Assess your retirement needs and estimated the future value of your retirement savings including investments/other retirement schemes plus your other savings and investments. Build your wealth through savings and long-term investments to meet your retirement needs. Starting point for your financial planning process – gain an accurate understanding of your current financial position, including your net worth.
Net worth is calculated as your assets minus your liabilities. Asset is what you own, including, savings, property, investments; liability is what you owe(mortgage, tax bills/outstanding debts).
Through sound money management and investments, you build savings which contribute towards your assets. In terms of the money you can spend/live upon, you may carve out from your net assets, estate you want to pass down to heirs or donate to charity.
COMPONENTS OF BASIC FINANCIAL PLAN
> Responsible borrowing: Responsible borrowing is an integral part of financial planning. Personal loans and credit e.g. mortgage loan and car loan can help you achieve your financial goals, but over-indebtedness can jeopardize your life plan.
> Managing day-to-day finances: Managing your money with an effective budget planner helps you identify where you can set aside funds to build your savings while tracking down your expenses.
> Future consumption: Future consumption includes life events such as education, family and home/car. These expenses may deplete your assets and can be long-term financial commitments.
> Insurance: Unexpected incidents/emergencies in life such as accidents, illness and death can deplete savings and erode assets. Risk management is a component of overall financial planning, financial protection against unforeseen circumstances and risks in life.
Strategies for Saving Money Each Month
The Traditional Methods
> Every day put all loose change into a jar, once full, deposit the money in savings account. Soon, money will grow into a little nest egg.
> Set aside an amount of money each month/pay-cheque for your savings. People have been doing this for years, but it takes discipline.
A Newer Method: Pay Yourself First
Most people pay all bills first, then save anything that might be left over. Paying yourself first, money will get saved because paying yourself becomes first priority. Nice thing about this method is, if your budget is tight, it forces you to make adjustments elsewhere and your savings continue to grow.
The Smartest Method to Save Money: Have a Spending Plan
The best method to saving money is to create a Spending Plan or a Budget. With a budget you figure out what your income is and what your expenses are. There are ways to reduce expenses or increase income to allocate an amount of money that can be saved. This method takes a bit of work at the beginning, but it works.
Ways to Save Money – How to Do It
Use One Savings Account
> Emergency savings account
> At least one savings account for major purchases
> Retirement savings account
Use Many Savings Accounts – If you find a bank or credit union that offers a free savings account, you can open up several savings accounts. Then every time you get paid, you can put money into each of these accounts for every specific thing that you are saving for. This way you can keep your money safe from accidently being spent, and it will be there when you need it.
Places to Save Your Money
In Your Safety Deposit Box – Stashing cash in your safety deposit box is definitely safer than using a mattress or burying the money in the back yard, but money in a safety deposit box doesn’t earn interest.
In Your Bank Account – A chequing account or regular savings account is no place to save your money. Most of them pay any interest because the bank lends your money to other people when you aren’t using it. Money in a regular bank account might get used often, or you might need to withdraw it quickly, so the bank can’t lend that money out for very long because you might need it.
Other Investments – There are numerous other investments that you can use to save your money: money market funds, bonds, stocks, mutual funds and etc. If you plan to spend your savings within five years, best to find something safe to invest in. Most people, high interest savings account or a term deposit within a Tax Free Savings Account works just fine. These options are safe and sure—you know that your money is going to be there when you need it-like the stock market.