Your financial plan: Where you are now and where you are going?

Finan­cial plan­ning is the most effec­tive way of ensur­ing your finan­cial needs are met through­out life. By set­ting real­is­tic achiev­able tar­gets, you can invest your money more effi­ciently and reduce uncertainty.

A finan­cial plan is not a pre­dic­tion of the the future but a tool to help you in attain­ing what you want in life. It has to be flex­i­ble, since your needs and goals may change. For exam­ple, sup­pose you have been sav­ing for a num­ber of years to buy a house in your home town. You are unex­pect­edly offered a bet­ter job in another coun­try, so now you may have to con­sider pur­chas­ing a house in that coun­try instead. The way of life, con­sumer prices , invest­ment oppor­tu­ni­ties and the insur­ance and mort­gage sys­tems may all be dif­fer­ent in that coun­try , but your salary will be higher too. You may need to review your exist­ing plan and make some changes.

Finan­cial plans are not only about pur­su­ing goals. You also need to know the amount of wealth and lia­bil­i­ties you have at present and to assess your cur­rent income and out­go­ings. Many peo­ple set finan­cial goals but do not have an accu­rate idea of their net worth or their cash­flow , so they can­not invest effectively.

Few peo­ple really enjoy mak­ing these cal­cu­la­tions , because they tend to remind us of uncom­fort­able truths about our spend­ing habits, but learn­ing to face up to prob­lems and find­ing ways to solve them are all part of the dis­ci­pline of finan­cial plan­ning. If you develop the habit of mon­i­tor­ing your income and expen­di­tures , you will find it much eas­ier to cope with life’s finan­cial pressures.

Hav­ing an accuarate pic­ture of your ongo­ing income and expenses gives you finan­cial con­trol. It helps you to see:

• how much you can save
• whether you are spend­ing more than you earn
• what plea­sures you can afford
• the pos­si­ble finan­cial effects of a major change, such as buy­ing a home or chang­ing jobs

Also, to get  a clearer pic­ture of your over­all cash­flow, you should also review your income and expen­di­ture annu­ally. If you pay income tax, you will prob­a­bly have to col­lect much of this infor­ma­tion to com­plete your tax state­ment each year. For your per­sonal cash­flow bud­get , how­ever, you need to break­down your expen­di­ture into much more than tax author­i­ties require. This is to help you spot any waste, and to see if you can reduce your expen­di­ture to free more money for investment.

When I was doing a com­pre­hen­sive finan­cial report together with one of my clients, a young but ambi­tious man, he told me that he felt that what he was earn­ing was not enough, despite get­ting a very attrac­tive pay pack­age. After we sat down and did a finan­cial report for him (included a break­down of this monthly expen­di­tures) he was shocked to see that his monthly car loans ser­vic­ing took up about 70% of his monthly expen­di­ture.  This gave him very lit­tle lee­way to build up spare cash for invest­ing. He too, felt that he could hardly afford to spend any money every month, eat in a nice restau­rant or splurge occa­sion­ally on him­self. This made him scrimp and save yet he felt mis­er­able despite hav­ing such a high salary. Need­less to say, he realised his extrav­a­gance in spend­ing on a lux­ury car when all he needed was just a nor­mal car and soon got a smaller car. This freed up cash for his per­sonal use, and allowed him to put aside some cash for his future use.

Tags: buying a home, financial, income, mortgage