Like any other planning activity, financial planning might feel uncomfortable at first. Discomfort origins might range from not feeling completely secure about what to do or when, through complex new terms, to pure fear that it might turn out you cannot reach your goals and get discouraged. Understanding how to do it in small easy steps can help everybody set up goals and achieve great transparency on the way forward.
What is financial planning?
In general terms, financial planning is a process of framing objectives, programs and procedures with corresponding budgets in order to streamline financial activities. Some of the major reasons to do financial planning are:
- Ensure adequate funds for goals,
- Ensure reasonable balance between inflow and outflow of funds, so that you have stability and predictability,
- Create investment strategies depending on the horizon of your goals, your risk tolerance and your familiarity with investment tools,
- Put some transparency and security around your personal goals and family needs in the long term,
- Having a plan and transparency helps reduce uncertainties and gives opportunity to rebalance and reprioritize over time as life situations change.
How to get started?
1) Map your net worth.
First thing to do is to create a quick list of your current financial state. You can start by listing all your assets and liabilities, so that you can get your current net worth (all assets minus all liabilities). This is a snapshot of your current balance at present.
An asset is an item of value that provides a current, future, or potential economic benefit for its owner. For example, cash, your house, or investment stocks owned by you are all assets.
A liability is something that you owe to someone else, typically an amount of money. Liabilities are paid off over time usually through the regular transfer of money, goods, or services.
Once you have listed the elements, you can also model the inflows and outflows connected to them, so that you can make some projections for the future. Some examples include inflows of your regular salary, and outflows as downpayments to loans. There might be assets that you already fully possess and they don’t necessarily generate inflows and outflows in the future, but still they might need to be reviewed and updated as value changes over time – in many cases properties increase their value and vehicles decrease their value, so to keep your balance current, you can review them once per year.
2) Set your goals.
Once you have the current balance of assets and liabilities, you can move to the next step, which is to look at your goals. What do you really want to achieve? And how and when can you finance it? To make your financial goals more inspirational, ask yourself: “What do I want in my life in five years? What about my life book in 10 or 20 years?” Do you want to own a car, a house or start a business? Are family and kids in the picture? How do you imagine your life in retirement?
Depending on the stages in life there are different things that matter. When we are young, funding our education or buying the first car or home can be the most important thing. Once you have a family, providing and securing your family and children’s future become priorities. And having in mind the latest development, it gets more and more important that each and every one plans for their retirement, and the earlier you start the better. If you put your goals in time perspective, you will be able to see how to distribute your savings and investment to achieve these goals without pressure, with short adjustments and pure transparency.
3) Maintain transparency.
Goals can change over time and priorities might change but having full transparency of the effects of your financial decisions can provide you with confidence and relieve pressure. When under pressure, many of us can make decisions that instead of contributing to our financial stability put us in debts, lead to other bad decisions, or just prevent us from paying attention to what is important in our life, and when the time comes, we find out that we don’t have enough savings to reach our goal. So the third element is to create full transparency by regular updates towards goals and tasks that reminds you what to do.
There is no specific format for financial plans, but in most cases they tend to include the following elements:
- Current financial situation – net worth and cash flows
- Inspiring financial goals linked to life events
- Investment strategies – it is best if you do this with an independent financial advisor who can determine your risk profile and give you the best advice for your specific situation, also including tax considerations. There are now also a number of robo-advisor tools as well as enough online training and information if you want to dig deeper by yourself having in mind the investment of time you have to put into it. Depending on the goals, you can have a different set of long-term, mid-term and shorter term strategies and plans linked to your different goals.
- Comprehensive risk management plan – you should include life and disability insurances, some property and personal liability coverage and also don’t forget to create an emergency fund.
- Retirement plans also become an integral part of any financial plan, regardless of your priorities at the moment. In the current reality, it’s best if you start to take care of this with your first job. It might be also the single most expensive thing you need to buy or save for.
Last but not least this is not a lonely journey. You might have a loved one and share a common goal or a trusted financial advisor who can create with you the plan but also the necessary tasks to achieve it. Having an easy way to share only what you need to share is important to boost your motivation.
Are you ready to take the first step?
You can always start on paper, or use an excel sheet or a tool such as ViziWealth that supports you, get transparency, set up the goals, follow them through and enjoy freedom from pressure or uncertainty. The most important thing is just to start and then get it going for a while. It becomes a habit to plan and adapt your financial goals once you have the transparency and you enjoy higher satisfaction in your life.