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.