The financial planning process

Here is another great and inspiring article from one of my mentors, Fely C. Santiago.  I’m sharing this for the benefit of those people who are still in the learning process of accumulating their wealth.

Most people never plan to fail; they just fail to make a plan. Why is there a need for a personal financial plan? Because when pay day comes, it’s always easier to spend, shop, and go on gimmicks than to save or invest some money. To most people the future seems so abstract. No wonder you hear a lot of them complain they have “no money”.  They work for 10 or 20 years, get promoted many times with corresponding increases in their salary, but still, they have no savings.  So they never get out of the “rat race”.  They worked so hard every day just to pay their bills.

It’s really not how much you earn but how much you keep that will make you financially secure.

Again why is there a need for a financial plan? Because it can help you achieve all your financial goals like retire in 20 years with P20 million; travel to Europe in five years; build your dream rest house in 15 years; or provide for the best college education for your children. A good financial plan will help you achieve these goals. When you have a plan, you will think twice before spending that hard-earned money.

A solid financial plan is very valuable. It provides direction. Without strategy and discipline, it is very probable to make impulsive and random decisions with your finances. When you see the big word SALE in the mall, or appliance MADNESS, you can easily spend your money even before you earn it by using your credit card.

Financial planning is a dynamic process that changes as your financial situation and position in life changes. The question is how to put financial plan in place? What are the steps?

Personal Financial Planning Process

Step 1 – Examine Your Current Financial Situation 

A good financial plan starts with a financial check-up to understand your current situation. How much money do you make? Where does your money go? Do you spend them on needs or wants? Do you have savings or investments? Do you have any life insurance or healthcare coverage? Do you have debts? What are your assets and liabilities? How much is your net worth? If you lose your income today, how many years (or months) can your savings last you?

To survive financially, you have to step back and see your big financial picture and see the big picture. It will require a lot of record keeping especially when it comes to your expenses. If you know where your money is going then it is easier to identify what you can eliminate or reduce in your expenses.  That way, you will have money to save or invest for the future. It will be a tedious process in the beginning to record all your expenses but it can be an eye-opener and the first step to take control of your financial health.

Step 2 – Identify Your Financial Goals

What are your dreams? When do you plan to retire? How much money do you need for the education of your children? Setting your financial goals is critical to create a successful financial plan. You can’t achieve your financial goals if you don’t know what they are. Defining your financial goals involves writing them down, putting a value in each of them and determining when they should be accomplished. You can classify you goals into short-term (one to three years — a wedding plan); medium-term (four to ten years – purchase of house and lot); or long-term goals (more than 10 years –college education of your baby)

You can use SMART guideline to set up your financial goals – Specific, Measurable, Attainable, Realistic andTime-bound. Your financial goals must have deadlines else you might not enjoy what you worked hard for. If you set up a goal to purchase a BMW in 2020, then by all means buy that BMW when you have the money at that time!

Also take note that as you age, your financial goals also change. Just keep in mind though that goals aren’t elusive.  Rather, as events happen and goals are achieved, they give way to other goals. Financial goals are like stepping stones. Without a solid financial plan as a solid footing, it’s easy to lose your step and get off-track from reaching your dreams.

Step 3 – Develop a Plan of Action

After analysing your current situation and defining your financial goals, the next step is putting a plan of action. What are the specific actions you need to take to bring you from your present financial position to the attainment of your financial goals?  Let’s say you want to retire in 20 years with P20 million, how much money do you need to save each month starting today? Which investment vehicle will you put it in? At what rate of return?  If your desired savings is less than what you can afford then define specific action to take to increase your cash flow to meet your desired savings or investment target.

In coming up with your action plan, you also have to take into consideration changes in your life or unexpected events. What if something happens and it turns out to be catastrophic and tragic? How do you get yourself protected? If something happens, you want to make sure that you have access to instant money to get you through that situation.

Specific action must address every aspect of your financial plan that would cover debt payments, income or asset protection, long-term healthcare, creating emergency fund, planning for retirement, college education, investment strategy and estate planning.

Step 4 – Implement Your Plan

I would say this is the most difficult part in the financial planning process – execution of the financial plan. Unless you implement your plans, then nothing will change in your financial life. You will never achieve your financial goals if you don’t implement your plans. Have a bias for action!

This step will require a lot of discipline like paying yourself first every payday so you meet your savings and investment targets.

To implement your financial action plan, you may need assistance of agents or brokers. For example, you may use the services of an insurance agent to purchase property insurance or the services of an investment broker to purchase stocks, bonds, or mutual funds.

Bottom line, just do it!

Step 5 – Monitor, Re-evaluate, and Revise Your Plan

Your financial plan will not stop when you implement it. As mentioned earlier, financial planning is a dynamic process and will have to be adjusted when there are changes in your personal, social or economic status. Periodically you must review your progress and assess your financial decisions. Birth of a new child will mean revising your financial plan as it can affect your cash flow, education plans or retirement plans.

If you seriously follow these steps, I assure you a sound financial plan will give you peace of mind. Uncertainty about finances creates a lot of anxiety. We all know money is the most common cause of marital stress and broken families. If you know where you stand financially, where you are going, and how you’re going to get there, you’ll feel more confident about your financial situation, about yourself and about your relationships.

If you haven’t started working on your financial plan, just follow these financial planning process and you’re on your way to financial freedom!

Original link to this article can be found here.

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