The Importance Of Financial Planning

The Importance Of Financial Planning

Making plans is in my nature. I know this because of my devotion to the Google calendar, my habitual earliness and the satisfaction I feel when ticking off an item on my To Do list. I am always looking ahead and planning for what is coming next and there is no area of your life in which this is more important than with your money. But where do you start? What financial issues should you prioritise? Which financial fire should you fight first? Understanding your financial needs will help you make smart decisions with your money, achieve your goals and avoid forking out your hard-earned cash on products you don’t need. Here is how to do it.

Consider your goals – Aim to create a vision of various stages of your life and make goals which align to it. You should ideally have a Right Now plan, addressing your financial needs and budget as they stand today, a Next Up plan, for what is coming up next including things like clearing debt or raising a family, and a Long Term plan, for later on in life including your plans for retirement. Your plans need to be flexible, realistic and unique to you. Consider your needs in each of the following areas, in the following order:

1. Income to cover your expenses right now.
2. Protection in the event that you die or become seriously ill.
3. An emergency fund or income protection plan in case you are out of work (especially if you are self-employed).
4. Saving for retirement (yes, even if you are young).
5. Saving for specific future wants and needs.
6. Investment.

When thinking about each area, think about what provisions you already have in place and address the gaps, with 1. being the highest priority where you should direct your attention first, and 6. being the last.

Consider your worst case scenario – You need to ask yourself some difficult questions. For example, do you have enough savings in your own name and sufficient earning power in case your relationship was to break down? Do you have a rainy-day fund or a secondary income stream which would cover your expenses if you lost your job? Do you have sufficient life assurance in place to take care of your children if something happened to you? If your answer to any of these questions is no, your Right Now plan needs to address it and you must never assume it won’t happen to you. It is one of life’s realities that things go wrong and you need to make allowances for that.

Plan to enjoy yourself – I have talked before about the minimalism movement and very disciplined people out there who practice ‘no spend’ days, months and even years. While I have great respect for these people, I know that it is not realistic for many people. You can be frugal and your indulgences do not have to be extravagant, but a little bit of what you love is so good for you. Saving and planning for the future is really important, but you are alive today and your financial plans should empower you to enjoy it. For example, your Long Term plan should not restrict you to such an extent that you can’t include your desire to take a summer holiday in your Right Now plan. One thing that you can know for sure is that you are not going to live forever and you deserve to enjoy your money now, rather than save every penny for some imaginary day when you will one day smash open your piggy bank and start living. Plan your splurges and savour them; you work really hard for the privilege of doing so.

 

The purpose of this feature is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.