Wealth

Financial Adviser: 5 Smart Ways to Create Your Own Personal Financial Plan

Have a clear direction of how you will achieve your personal financial goals.
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There is a saying that if you don’t know where you are going, any road will get you there. When you don’t know the way, how do you know which route is the best direction to go?

You may be hoping to be financially independent someday, to have enough savings to allow you to stop working and choose the lifestyle you want. You also envision a retirement life that is free from financial stress and worries in the future. A personal financial plan can help.

While it is nice to aspire for a comfortable life and to have the vision of financial freedom as your goal, you must have a clear direction of how you will achieve it. Having a goal without planning is just dreaming.

To achieve your financial goals, you must lay out your strategies and timetable. When you do financial planning you will appreciate how one financial decision can affect the other areas of your financial life.When you understand the meaning of every financial choice you make, you will be more focused on finding ways to achieve your goals. Writing a financial plan may not be easy for a beginner like you as the design may involve some assumptions and computations.

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It may help to get the assistance of a Registered Financial Planner (RFP) who is trained to make personal financial plans to guide you in the beginning. But as you learn in the process, you should be able to create your own roadmap.

To give you an idea about how to make your personal financial plan, here are the five steps to financial planning success:  

Step 1: Define your financial objectives and goals

Begin with the end in mind. Every person has different goals and priorities in life. If you are in your early 20s, your goal may be to get married and build a family someday. If you are in your 30s to 40s, your goal may be about saving enough money to send your children to the best university in the future. You may also be planning to buy a house or putting up a business for your retirement.

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Whatever your goal is, you must prioritize and be ready to pay the price to get it. Every goal must be quantifiable and achievable.

For example, if you want to get married in two years, you must make an estimated budget not only on how much it will cost you to get married at that time, but also the minimum costs you will spend for living expenses as a newly married couple.

Step 2: Determine your financial situation

Before you begin planning your strategies on how to achieve your goals, try to look at your total financial picture. How are you doing financially in terms of income and expenses? What financial assets do you have? How much do you owe?

To evaluate your financial standing objectively, you must prepare your own personal financial statements similar to what companies do. Preparing monthly income statements helps you to identify possible cost-cutting exercises to boost your savings, as well as to determine the amount of additional income needed.

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Preparing a financial balance sheet helps you identify your net worth, computed by deducting all your liabilities from your total assets. Knowing what you own and what you owe can help you assess your overall financial situation in terms of risk tolerance when you make investment decisions later.

When you have your personal financial statements ready, you can further analyze them by doing various ratio analyses to determine your financial capacity and stability. 

Step 3: Develop your financial planning strategies

After you have analyzed your financial capability based on your current situation, you can now develop your action plans to achieve your goals. By this time, you must have already addressed any issues and opportunities that have arisen from your assessment.

When you plan your strategies, you can evaluate your alternatives on where to put your money to grow. Your investment will generate the projected value that you expect to finance your goal.

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For example, if your goal is to have an amount of money sufficient to pay for the college tuition of your child in 10 years, you will be investing your money now in an investment vehicle that will grow its value exactly in the same period.

Choosing which type of investment vehicle to use will depend on your risk tolerance. The higher the possible returns you want to make from your investments, the higher risks you need to take. 

Step 4: Implement your financial action plans

Many people think that success from financial planning comes from awareness when the thing that really matters most is discipline. If you really want to achieve your financial goals, you have the discipline to implement your action plans.

For example, if you need to really save money, you must enforce a disciplined savings plan. One way to do this is by first setting aside a certain percentage of your monthly income as savings before you spend the rest for your expenses. Another is discipline in investment decisions. If you are following certain investment policies, let’s say, investing only in blue chip stocks, then you must have the discipline to avoid the temptation to invest your money in riskier unknown stocks.

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Your personal financial action plan must include all the tasks that you need to do in order to achieve your goals.

Step 5: Monitor your financial plan

Personal financial plans are made based on assumptions and changes in the economic situation can change your assumptions. For example, if the exchange rate at the time you made the financial plan was P49 but after six months, the peso went down further to P51, then you must update your projections based on the latest economic assumptions.

Or it is possible that you may find implementing your strategies difficult that you need to change it to more achievable levels. There can be a lot of possible changes that you can make to make your financial plan relevant at all times.

It is important that you make a periodic review of your financial plan every three to six months to assess whether the strategies you made are effective or not and update any changes in your assumptions about your financial situation and economic environment.

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Henry Ong
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