Most of us would have the experience of being approached to do "Financial Planning" or to have a "Financial Review". Many Consultants simply assume that the person we are talking to understands what "Financial Planning" is. From my experience, this is a mistaken assumption. In this issue, we go back to basics to have a bird's eye view of what "Financial Planning" really entails.
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Financial Planning is an ongoing process to help us make sensible decisions about money so that we can achieve our goals in life. It is not just about buying products like insurance. It is also much more than just investments or saving plans.
The following diagram suggests the 6 steps of the process.
Cash Management
The rudimentary step in financial planning is Cash Management.
The goal of Cash Management is to achieve the following:
1. Maintain positive cash-flow, whereby our annual income > annual expenditure
2. Use surplus cash to accumulate assets and minimize debt
3. Create passive cash income from assets
Some obstacles to good cash management include, over-spending, over-gearing in debt repayment, and accumulating debt which outgrows our assets.
Here are a few tips to overcome those obstacles - save more money than we spend or save away the money before we spend it. If our debt servicing reaches 25% of our total income, start using cash and avoid leveraging when making purchases or investments.
Risk Management
There are two major personal hazards that anyone can face - unexpected large medical bills and sudden loss of income.
Insurance policies are designed to better manage these two risks.
Examples of “low likelihood and high impact risks” include early demise, or disability. The impact will not only be felt by our dependents, our standard of living will be adversely affected.
Examples of “higher likelihood and lower impact risks” include falling sick and losing time and income during recovery. The impact varies on the severity of illness and time needed to recover.
Wealth Accumulation
Planning that fall into this category include Retirement Planning, and planning for other goals such as Children’s Education or starting a business. Besides the absolute amount we must plan for, we also have to take the impact of inflation into consideration. Inflation can have a very great impact on the amount of money we need.
For example, if we are 30 years old now and would like to retire at age 65 (35 years later); assuming we need $3,000 per month now, we would need at least $8,442 per month on retirement (based on only 3% inflation). The same principle applies for other savings goals.
Wealth Management
When we start to earn an income, we cannot avoid paying taxes. There are strategies that we can use to reduce our taxes, legally of course. Wealth Management also includes the expansion (growing our Net Worth) and distribution of assets on our demise – a.k.a. Legacy planning. For business owners, Business Succession Planning is also important.
Conclusion
The keys to successful financial planning are having good money discipline, making smart decisions and planning early. Your Financial Consultant is trained in all aspects of Financial Planning. Contact your personal Financial Services Consultant for a review to find out more.
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