PREPARING A FINANCIAL PLAN

A financial plan is a blueprint for effective money management. It gives a thorough picture of your current financial state, financial goals and plans to achieve these goals. Everyone needs to have one irrespective of their level of income, assets, or wealth.

WHY DO YOU NEED A FINANCIAL PLAN?

It gives broad information on income, debt, savings, investments and so on.

It can help in fulfilling long term plans like early retirement.

It provides encompassing information concerning your assets, funds, risk appetite, individual and personal financial situations as well as how they can be effectively optimized.

STEPS IN PREPARING YOUR FINANCIAL PLAN

Identify your financial goals: It is important to create a plan with a goal or a set of goals in mind. This is so that your plan can be situated towards the achievement of those goals which could be to buy a house or buy a car or to retire early. You can have more than one goal, but goal prioritization is key.

Set a time frame: When do you want to buy that new car? When do you want to retire? Setting a time frame will help give you direction and inspiration. A time frame will serve as a guide to achieving the goals.

Gain an understanding of your current financial situation: How much is your income and how much are your expenses? What are your assets and liabilities? Now, compare these with your set goals and time frame. Do your plans appear reasonable or do you need to adjust your goals or time frame? If your plans appear reasonable, you need to then obtain a deeper understanding of your income and expenditure pattern. You need to examine your recurrent expenditure e.g. mortgage, rent, gas and seasonal expenditure e.g. wardrobe change, Christmas gifts for adequate planning. You should also identify the due dates of your bills. It is important to document your real-time spending and not overlook small expenditures from groceries to dining out to chewing gum purchases. Also, do not forget to check for prescheduled charges against your bank account which could be monthly e.g. subscriptions. Loans and other types of debts accumulate interest with time, and this increases expenditure. Hence, it is advised that debts are paid down first. Debt management is key.

Prepare a monthly budget: This is great for keeping finances under control for short periods of time which eventually affects long term goals. With an understanding of your current financial situation, you can set up a monthly budget. While budgeting , attempt cutting down on expenses as much as possible and consider obtaining passive sources of income to achieve your goals faster. It is not right if you save up 70% of your income when your expenses would usually take up around 50% of the same income. This shows that your budget is unreasonable and needs to be adjusted. The monthly budget gives you a monthly spending plan. Ensure your budget has some allowance for contingency situations to avoid having to take costly, quick loans to sort out unforeseen emergencies. 

Consider obtaining passive sources of income: Most people do not earn enough from their 9-5 jobs to achieve their financial goals hence, the need to consider investments as they are great sources of passive income. When building an investment portfolio, several factors need to be considered such as your risk appetite. You can also seek professional help. For more information on investment building, check out our articles on investment building

Tax minimisation: It is also important to consider areas where taxes can be legally minimized. A reduction in taxes means an increase in savings.

Insurance: It is important to have a cover over your assets and finances. Insurance helps to reduce the financial liability that may arise due to investment collapse, car crash, illness, property ruin or death. You can also reduce future expenditures by taking regular health assessments to prevent illnesses that could result in larger expenditures.

Your financial plan changes over time. Track your progress, review, and adjust your plan according to your most recent circumstances. This could include getting a new job, having a child which increases expenses and so on. Make sure that your financial plan is reevaluated as consistently as possible.

You can request the help of a professional financial adviser. They can help create a financial plan, offer specialized guidance, and follow up to track the progress. You can also do it yourself by making a thorough evaluation of your current financial state along with future goals.

The road to financial freedom is not always easy and it would require that you are disciplined, avoid overspending and you spend in line with your set budget. It is okay to make mistakes when you cannot resist the urge to make certain expenditures, but it is important to realign your focus on your goals and comply with your budget.

REFERENCES

Kagan, J. (2021, June 15). Understanding Financial Plans. Investopedia. https://www.investopedia.com/terms/f/financial_plan.asp

Voigt, K., & Benson, A. (2021, August 4). What Is a Financial Plan, and How Can I Make One? NerdWallet. https://www.nerdwallet.com/article/investing/what-is-a-financial-plan

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