Creating Your own Financial Plan by Alvin Tabanag
Filipinos have a common misconception about financial
planning being only for the rich. Many
also see it as boring, confusing, and tedious. Financial planning is not just for the
wealthy. It is for every responsible
Filipino who cares about the financial future and security of their
family. Creating your own
financial plan can be an enjoyable and exciting endeavor if you know how to do
it. Here are the steps in
creating a comprehensive and effective financial plan.
1. Set smart financial goals.
You will not know what to do or where to go if you do not
have goals. The first step in creating a financial plan is to set “smart”
goals. A financial goal
should be specific (clear and detailed), measurable (includes an amount), achievable
(doable with sufficient effort), realistic (not impossible), and time-bound
(should have a deadline). Write
down your goals, prioritize, and classify into short, medium and long-term
goals. Split big goals into a series of smaller sub-goals to make it easier to accomplish. Visualize
your goals often to keep you inspired and improve your chances for success.
2. Assess your financial
condition.
Knowing your present financial condition will allow you to
develop a better plan of action to hit your financial targets. It will also help you determine if the goals
you have set are achievable and realistic. There are three things you need to determine
to know where you stand financially: the things that you own which are of value
(assets), the things that you owe (liabilities), and your net worth, which is
the difference between your assets and liabilities and also called the true
measure of wealth. Update your
list of assets, liabilities and net worth once or twice a year so you can
monitor your progress.
3. Create a budget &
savings plan.
A budget or spending plan will help you control and manage
your expenses. It is also a vital
tool for achieving your goals. The
first item in your budget should be the amount of your monthly savings. Ideally, this is 10-20% of your
income. If this is too much, start
with a smaller amount and just increase gradually. Your spending plan will also include a
budget for debt payment, housing expenses, food & groceries, utilities,
school-related expenses, transportation, clothes, vacation & recreation,
and charity, among others. Get
inputs from other members of the household so you can come up with a realistic
spending plan that they will follow.
4. Manage your debt.
Paying off debts should be one of your top priorities
because huge amounts of debt can keep you from accomplishing your financial
goals. Make a list of all your
debts, including how much you need to pay monthly and the due
dates. Prioritize paying
the debt with the highest interest rate and just pay the minimum for the
rest. Debt management also
includes taking steps on how to keep your debt in check. These may include
changing your lifestyle, strictly following your budget and carefully
evaluating any planned purchase. You
will not be able to get out of a debt hole if you continue adding to it.
5. Get ample insurance
protection.
Death is a certainty in life. A life insurance policy is absolutely
necessary if people depend on you financially. The proceeds of your life insurance will
address many of your family’s needs after you go six feet under. It will help them continue to live
comfortably even when you are no longer around. Talk to an insurance agent to know how much
protection you need but buy only what you can afford for now. You can always add to it later. You also need to get health insurance to
cover medical expenses in case you or any member of the family falls ill or
injured. If you own a home you
should also have it insured.
6. Plan for your children’s education.
Every year hundreds of colleges and universities increase
their tuition fees an average of 10%. If
you have children, it’s a must that you prepare for their education well in
advance. You just can’t depend on your salary because there’s no guarantee that
you will still be earning well when they enter college. The earlier you start saving for your
children’s education, the easier it will be on your pocket. Consider buying an educational plan for your
children from pre-need companies or life insurance firms. You may also opt to save money specifically
for their education and invest on your own.
7. Plan for your retirement.
You will likely spend a significant portion of your life in
retirement. Whether it will be a
comfortable or a miserable retirement will depend heavily on how you prepare
for it. Government statistics show
that 75% of senior citizens are poor and another 15% are just meeting basic
needs. Only 1 in 10 seniors is
living comfortably because a vast majority failed to plan adequately. You simply can’t rely on your government
pension because it’s not enough. It’s
also unfair to obligate your children to give you old age
support. Retirement planning, which should be started as early as
possible, will include deciding on a retirement age, determining your future
needs and saving/investing to accumulate required funds, among others.
8. Create an investment plan.
Keeping your money at home or in low-interest savings
accounts will lead to a steady decrease in your purchasing power because you
will not be able to keep up with the effects of inflation – a “savings
killer.” It will also take you
longer to achieve your goals. If
you are saving P3,000 monthly and you put it in a savings account that only
earns 1% per year, it will take you 25 years to accumulate P1 million. Place it in an investment that earns 6% a
year and it will only take you 17 years. Consider investing regularly in
long-term time deposit accounts, mutual funds and unit investment trust funds
(UITFs), government securities, investment-linked life insurance, stocks, real
estate or in a business venture.
9. Plan for the transfer of
your wealth.
It is essential for the proper and orderly disposal of your
assets. Your children could turn
against each other or turn hostile towards your spouse if you don’t have an
estate plan. In simple terms
estate planning involves how you want your estate, which includes all real
estate properties, cars, jewelry, cash, investments and other assets that you
own, to be distributed after you die. Basically,
it identifies, through a will, who gets what. Estate planning is a somewhat complex
process and requires considerable legal documentation. It is best that you consult with an estate
lawyer.
A complete financial plan will cover all of the areas
above. However, not all areas may
apply to you at the moment so work only on those that are currently relevant to
you. If all these seem too
complex and daunting you can always engage the services of a financial
planner. A financial planner can
help you craft a realistic financial plan that covers all important areas of
your finances
No comments:
Post a Comment