Personal Financial Planning - What it Means and EntailsPersonal financial planning is a much-used expression, but do you really understand what it means? And what it entails? If you are not sure, then that should be your starting point - to get familiar with what this process, vaunted as a life-saving exercise, entails and how to get it to work for you for. A personal financial plan is an expression of your financial goals and road-map, an instrument designed to ensure that you become what you want to be, financially, and get things done that you want to do, by being able to finance them. It is a strategic positioning process that seeks to ensure that you achieve the healthiest financial status that you are capable of. It aims to realise your best income potentials and to apply those resources in the most optimal manner to meet the financial goals you desire. A personal financial plan will therefore define your goals, outline what you must do to achieve them and regulate the application of your resources in a way that helps you achieve the goals you set. That means that it is for everybody, irrespective of their income level. Having a plan helps you take charge of the future in the sense that you can define, substantially, what it will be for you. This is achieved by looking at specific aspects and needs of life and drawing up a game-plan for each that fits into your whole plan. Such areas, which define the scope of personal financial planning, include: Net worth computation and projection: Do you know your net worth at this point? What do you project it to be, say, 10 years hence? In 20 years? A personal financial plan should leave you, not only realising where you are now, but also with clear expectations as to where to be, going forward. Income generation plan: Your income-generation capacity is at the root of your ability to build financial strength, even though it does not guarantee success. You financial planning should evaluate your income potentials and draw strategies for optimising your earnings power. Savings plan: The quantum of your income will not impact much on your future financial standing if it is not protected, to a meaningful extent, from financially incapacitating splurge. Your savings plan defines strategies for ensuring that some income is saved from immediate consumption. Expenditure management and budgeting: Personal financial planning will deal with spending control measures, anchored in budgeting and other tools, that will help achieve the savings objective. Also important is the need to meet key requirements of existence and to achieve key project goals targeted to different periods of one's life. Cash flow plan: In dealing with resource and spending dynamics, the cash flow implications they generate must be considered and planned to ensure you remain just liquid enough. Excessive liquidity will fuel spending while acute illiquidity will create distabilising crises. That necessitates a balance. Investment planning: To further derive the full potential of saved income, it needs to be fertilised through investing, the process that puts it to work to earn more money. Investment needs planning and this is an important part of your financial plan. Risk management planning: How do you deal with the unexpected, the attendant risks of life? Like a fire disaster. Or an incapacitating accident? Is it after they have occurred? A financial plan doesn't wait but tries to provide protection for major risk factors. Insurance is one tool in this regard. Retirement planning: looking ahead to that period when your ability to work and generate income may diminish or cease and incorporating strategies for providing for it must form part of your financial plan. Estate planning: And what will happen to your estate if you cease to breathe today? Confusion? Or, perhaps an orderly provision has been made as to how your survivors proceed from where you stop? You may choose not to leave this to chance by planning for what happens in that situation. Tax planning is a big issue elsewhere and an important part of a financial plan, since not recognising this in structuring one's financial affairs could prove expensive in terms of what it turns over to the tax man. Tax reforms are focusing on improvements in our national tax management that should make tax payment and the tax obligation an important financial consideration, in time. Perhaps it's then that individuals will realise the need to seek help or spend effort to plan their tax management. As you can see, there are dimensions of personal financial planning, which is why people seek professional help for such exercise, particularly in much developed financial environments.That doesn't mean you must get sophisticated in the financial plan you draw for yourself. It's not going for a competition. It must however address your financial needs with the aim of putting you on a sound financial footing. That is difficult to achieve without dealing with the various spheres of interplaying financial variables as outlined here. The most important part, at the end, is to appreciate the need to take a defining stand on your future finances and to take steps to implement control.
|
|||
