Personal Financial Planning is the process of evaluating and improvement of one’s financial situation, through the studying of economic factors and individual choices.
It is essential to know how to save, spend, invest, and control your finances, in order to achieve financial and life goals. The reward of sound money management is an improvement in one’s standard of living and lifestyle. This is true whether you are a 20-year-old university student, a 40-year-old parent with a mortgage, or a 60-year-old thinking about retirement.
An important outcome in the planning process is the development of a personal financial plan that guides a person’s overall financial decisions. For instance, investment plans would involve asset allocation that determines the percentage of an investment portfolio to be allocated to equities, bonds, or other types of investments.
In theory, you can create your own financial plan. However, in reality, many people do not follow consistent plans in making their financial decisions. This is why many people prefer to engage professional financial planners to help them develop and implement sound financial plans, as well as monitor and review them periodically.
The financial planning process can be classified into 5 steps:
- Gathering your data
- Analyzing and evaluating your financial status
- Developing your financial plan
- Implementing the financial plan
- Monitoring and review
1. Gathering your financial information
Before creating a financial plan, you must first define your own personal and financial goals, needs and priorities. It is important to determine specific and measurable objectives to provide focus and direction for the financial planning process. In order to do so, you must gather both quantitative and qualitative data. You can see some examples below.
Quantitative Data
- Personal and family profile such as name, gender, date of birth, age, smoking status, marital status, job, information of spouse and dependents, etc.
- Assets and liabilities including CPF
- Cash inflows and outflows
- Insurance policy information
- Employee benefits
- Current investments
- Business information (if you are a business owner)
- Copies of wills and trusts
Qualitative Data
- Goal and objectives
- State of Health
- Career expectations
- Interest and hobbies
- Anticipated changes in lifestyle
- Investment experience and preferences
- Risk-tolerance
- Money values
- Family relationships
- Current and projected economic conditions
- Other planning assumptions
In the planning process, certain reasonable personal and economic assumptions need to be considered. These assumptions may include:
- Personal assumptions
- Retirement age
- Life expectancy
- Income needs
- Risk factors
- Time horizon
- Special needs
- Economic assumptions
- Inflation rate
- Investment returns
- Tax rates
2. Analyzing and evaluating your financial status
After gathering all the information available, you need to assess your financial situation and determine the probability of reaching the stated objectives by continuing your present activities. To help the analysis, you can engage a financial planner to prepare a statement of financial position, a current cash flow statement, and if appropriate, a projection of future cash flows. Or if you decide to do it yourself, you may find a free online retirement planning calculator, or investment goal calculator to help you derive your numbers.
Careful analysis and evaluation are critical to the financial planning process, because they form the foundation for determining the strengths and weaknesses of the your financial situation and current course of action. As everyone has limited resources, it is important to prioritize certain needs over others.
Common problems faced when assessing financial needs and objectives:
- Sacrificing long-term needs to meet short-terms needs. This is partially because instruments like insurance or certain investment products, are often used to meet long-term objectives. The rewards for such instruments may take many years to materialize. In contrast, short-term instruments are easy to appreciate, because they can provide returns in a shorter time-frame.
- You may concentrate on achieving certain personal desires (which you may perceive to be essential needs, but it might not be the case) at the expense of other real needs.
- If you have a large estate and/or many beneficiaries, it may be necessary to engage a team of professionals (which may include lawyers, accountants, financial planners, property agents, and investment brokers) to help you in the financial planning process.
We shall continue discussing steps 3, 4, 5 of the financial planning process, in part 2 of this article.
If you need to engage a professional financial planner, do contact your trusted FLA Organization financial planner today!
