Aggrey Jonathan K Bett

Creating an effective personal financial plan involves steps you must follow. Define the kind of life you want to lead in the short, medium, long term, and retirement. It would help if you considered matters like career, family, financial and wealth, education, attitude, character, friendships, public service, enjoyment and relationship with God. It would be best to consider where and how you want to live in retirement. Once you have defined your vision, you assess your current financial status to see how to improve income and contain expenses, establish goals to attain, prepare a spending budget, select savings and investment options, prepare and follow a plan (roadmap), monitor and evaluate progress regularly and consult financial planning experts where you are unsure. Below is a rundown of the steps:

Define your life's vision.

Before defining your vision for your life, we need first to understand why it is necessary to have a personal financial plan. Planning helps individuals think about their dreams, desires, needs, and many other ideas and opportunities they could pursue and make plans for them. Once you have a plan, the plan creates a roadmap, which, if followed diligently, will keep you from spending time and money on activities that are not critical to meeting your desires and focusing on things that will lead you to your dreams. A plan allows an individual or a household to use available resources prudently and create money to meet daily life expenses, comfortably afford wants and luxuries, save money for emergencies, and generate cash for use in retirement.

The starting point in personal planning is to define the kind of life (vision) you want to lead in the short, medium, long term, and retirement. Vision is an imagination of an attractive future status worth striving for. When thinking of a vision, you want to consider areas of your life that could improve. You could focus on career, family, financial and wealth, education, attitude, character, friendships, public service, enjoyment and relationship with God. You must also have a vision of how you want to live in retirement. You may also want to plan to retire earlier than the average retirement age.

Diagnose and appreciate your current financial situation.

The vision you come up with requires time, money, and resources. So, you must consider the current State of your income, expenses, debt, savings, and investments. This assessment gives you a good picture of where you stand financially and what you could improve to increase regular income and cut expenses to create room for savings and investments to generate more wealth and income for current living and retirement. You want to have sufficient regular income in retirement without having to work for it.

Setting goals

Having defined your vision, you now want to set goals to achieve in the short, medium and long run to realize the vision. You may have goals you want to attain in months and others in a few to many years. Some goals need money, and others require only time and the will to do. It is necessary to have goals for each area you want to improve. The goals must be SMART (Specific, Measurable, Attainable, Relevant and Time-bound). A SMART goal might read, "I want to save US$100 monthly to buy a car worth US$4,000 in three years from now". You should have a goal to create an emergency fund in six months. For every goal, you should determine how much money is needed by when and how much you should put aside periodically to achieve the amount. You could have goals to attain concurrently or sequentially (one after the other).

Prepare a Spending Budget

To properly use resources, you need a budget to tell you how much regular income you have and the necessary monthly expenditure. To prepare a budget, you need to determine your regular sources of income, essential expenses for daily living (you can add some wants if you wish), and amounts for saving and investing to finance the goals identified above. The budget must be balanced; if expenses are higher, you must determine how to increase income or cut costs. The budget must show weekly or monthly income and expenditure, including savings and investment amounts.

If you are planning for retirement income, you must have a retirement budget. This budget must show the income you will need in retirement, the expenses you will incur regularly, and an estimate of the assets necessary to generate that income. You build retirement assets slowly in your working life, which is part of the goals you set above. An example of such assets is a pension fund (annuity or a 401K) that can provide regular income to meet retirement expenses. Another is rental property.   

Choose investment opportunities

You save to accumulate cash to buy or meet significant ticket items like a car or school fees. You also save to build a nest for a more considerable investment. These aims require investment vehicles like interest-bearing bank deposits, stocks for dividends or capital gains, mutual funds, Exchange-Traded Funds (ETFs), etc. There are plentiful investment portfolios available to savers and investors. You must choose options that align with your liquidity, time horizons, return (ROI) and risk tolerance goals. It all depends on how much money you have, how much is needed, and when. It would help if you chose the appropriate investment opportunity centred on reasons such as your goals, age, risk appetite and the amount available for investment.

Implement the plan

Implementation involves making a plan (roadmap) containing initiatives, actions, and steps you must execute daily, weekly, monthly, and yearly to attain the goals. You need a spending budget with monthly income and expenses, including amounts set aside for saving and investing, reflecting what you plan to do to achieve aims. You must look at the actual outturns monthly, compare them with corresponding budget actions and amounts, and take corrective actions on deviations from the plan. You can revise the goals and the budget as circumstances change. You need to look at the retirement budget to ascertain whether the acquisition of retirement assets is on course or if it requires adjustments. 

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