Financial Planning - Part 1

The Good Life

Building a Firm Foundation
Why, you may ask, do you need a financial plan at all? The answer is quite simple. There is only one sure way to achieve financial security: you must identify your goals, then adopt strategies to meet them.

True, if you’re like most people you seem to get by from year to year without a financial plan. You collect your salary, pay your bills, and keep yourself and your family housed, clothed and fed. But what happens if a financial crisis occurs, you may find yourself lacking the funds of insurance to cover mounting bills.

If you talk to people who are most comfortable in their lives – the people who have achieved financial security - you will find they took an organised approach to financial management early on. Some did the work themselves. Others hired competent advisers to help them. But, somehow, they made sure the job was done.

The bottom line to financial security: you can get what you want only with an organised financial plan and the discipline to make it work. And the best time to start planning is now.

The Importance of Organisation
Why do most people fail to achieve lifetime financial security? Lack of financial goals is one reason. Ignorance of the tax law and poor investment strategies are others. But the chief culprit is lack of organisation. Organisation is critical to sound financial planning.

Organising your finances provides and exceptional measure of security. It protects you from surprises, and it also places your finances – both current and future – under a ‘master control’ programme that gives you a system of checks and balances. The system provides security when the unexpected occurs. Ant it even allows you to indulge yourself occasionally.

Then too, an organised plan can save you and your family from financial disaster. It helps you establish a pattern of spending, saving and investing that ensures financial stability now and growth for the future. Above all though, an organised plan builds financial independence. And financial independence equals financial peace of mind.

My Approach
The wrong way to begin the financial planning process is by making investments. It is far more valuable first to develop a financial profile of yourself, then to match appropriate strategies to your specific needs.

My approach to financial planning is built on answers to three deceptively simple questions:
• What do you have?
• What do your want?
• How do you get what you want?

Answer these questions in as much details as possible, and you’ll create a flexible, workable and successful financial plan. Repeat the exercise in a year or two or when your circumstances change, and you’ll update your plan.
The job is not as easy as it sounds. To answer these questions in a way that is truly helpful to you requires considerable effort. But the results are worth it. In the next series of articles, I will provide you with the information you need to answer these key questions. First, though, let’s look a little more closely at the question themselves.

What Do You Have?
Step one is the financial planning process is to determine what you have. And that involves developing your personal financial profile. Your profile is a composition of you stage of life, lifestyle, tolerance for risk, responsibilities and financial resources.

I will provide you with the tools you need to construct your personal profile in a separate article. For example, you’ll learn that stage of life is the sum of your age and circumstances – married, single, supporting children, not supporting children, and so on.

And you will see that life-style is about choices – your career choice, say, and how you choose to spend and save.
You will also learn about how to evaluate your responsibilities- elderly parents, perhaps, or other relatives who require financial assistance – and weigh your tolerance for risk. Can you afford to take risks with your money? And, if you can, what risks are you willing to take?

Your financial resources are simply what you have in Cedis and Pesewas or Dollars and Cents. How much do you have in your current and savings account? What is your cash flow – the amount that comes in and goes our each month? How much is tired up in retirement funds? Do you own a car? A boat? Is your house furnished with antiques? What about art on your walls?

The fact is; you can’t make informed financial decisions without first evaluating your financial health. In my next article I will show you how.

What Do You Want?
If you don’t know where you are going, you will probably end up somewhere else. Perhaps the most valuable aspect of a personal financial plan is that it forces you to state your financial objectives in Cedis or Dollars and milestones. What do you want and when can you get it?

In subsequent articles, you will learn in detail how to set financial goals that take into account your unique circumstance and aspirations.

How Do You Get What You Want?
Once you know what you have and what you want, you’re ready to develop comprehensive strategies for every aspect of your financial life. These strategies much be flexible enough to respond to changes in your personal and financial fortunes.

Your financial plan also much include a blueprint for implementing these strategies – a blue print that lets you know when and how to act. Later articles will help you develop flexible strategies for getting what you want. And they will show you how to direct your financial resources to reach your goals.

Email me with any queries or comments.

Constructing Your Financial Profile - Your Stage of Life

This article is the continuation of the earlier post 'Financial Planning - Part 1'

When you sit down with a professional financial planner, the first thing he or she does is construct your personal financial profile. You should begin there, too.

A financial profile is a snapshot of your life as you live it day by day. And it is the cornerstone of your personal financial plan.

Your financial profile is more that just your income and net worth - although income and net worth are certainly part of the picture. Rather your profile is a composition of your stage of life, life-style, tolerance for risk, responsibilities, and financial resources. In this article, we’ll start stage of life and how it affects your financial planning.

Your Stage of Life

Evaluating your stage of life is the first step in building your financial profile. What we mean by 'stage of life’ is simply your age and circumstances - general sense of where you are today.

Why is this information so important? Knowing where you stand helps you set your financial priorities.

Say you are thirty years old, single and with bright career prospects. You obliviously have different goals and needs than a retired person of seventy.

Here's one simple way of looking at your stage of life: Are you accumulating assets or disposing of them?

If you are in the accumulation stage, you are building wealth. But if you are in the disposition stage, you are building wealth. But if you are in the disposition stage, you are consuming your assets. Typically, you remain in the accumulation stage until retirement, and then shift to the disposition stage.

Another way of categorizing stage of life is by decade. In our twenties, most of us begin our career and possibly, a family. By our thirties, we may be advancing in our careers and raising your children. In our forties, we’re probably earning – and spending – more money and beginning to pay for college education for our children.

During our fifties, most of us cease contemplating career changes, and our earnings peak. We think seriously about retirement. And, if we have children, they are becoming more self-sufficient.

What about the sixties? This is typically the bridge to retirement. Estate planning becomes more impotent to us, and our grandchildren may be a priority. By our seventies, the majority of us are retired, and one focus of our financial planning may be making gifts to our families.

Naturally, theses patterns don’t apply to everyone. Far from it. You may, for example, be a late boomer – someone who did not start a career until your thirties. Or you may have retired very early – in your middle forties, to say.

More over, the circumstances of people’s lives today are almost infinitely varied.

Here are some typical categories into which you may fall:

• Single
• Married with no children
• Married with children
• Single with children
• Living with a significant other – with or without children
• Divorced with children
• Divorced without children
• Divorced and remarried with stepchildren
• Divorced and remarried without children
• Widowed

As you see, the list can go on and on. And each of these categories requires different approaches to financial planning. What is important: assessing our own stage of life and circumstances and tailoring our financial plan to meet them. The next article looks at the second of the five tools needed to construct your personal profile – Your Life Style

You can also read the preceding article that set the tone for this article 'Financial Planning - Part 1'

Email me with any queries or comments.