What is personal financial planning?
People ask what is personal financial planning and how it differs from corporate financial planning. Personal financial planning is about what an individual or a household does to plan their finances, while corporate financial planning is about preparing a financial plan for a business entity. Personal financial planning is an exercise an individual or a household performs regularly to manage their income, spending, savings, and investments to attain specific desired goals for now and in the future. The process also incorporates planning one’s present and retirement lifestyles, such as what to do besides one’s career, what to do in retirement, and how to finance all these lifestyles. It essentially entails active identification and generation of income streams, allocating part of the income for current needs, wants, emergencies and other requirements and saving and investing to create wealth for comfortable current and retirement living. Planning should also look at managing different areas of life, such as estate planning, career, family, children’s education, body, mind, soul, enjoyment, friendships and public service. Planning aims to create a roadmap for navigating all these facets to arrive at the desired destination in an orderly manner.
The process of personal financial planning includes the following:
Defining your life vision
Personal financial and life planning is about ordering your life and finances. Putting your life in order requires a vision of what needs doing to put things in line to attain the desired lifestyle and financial status. We have all heard the adage in the Bible (Proverbs 29:18) that a person without a vision (read a plan) will perish. A vision in personal life is a vivid imagination of an attractive future state that you would like to be in and is worth striving to attain. A dream reflects deep desires, visions, and hopes about life. It answers, “Where am I, where should I be going, and what should the end look like?” Vision is perceiving the end goal while still at the starting point. A vision is the ability to see something that is not visible yet. It is the end outcome once you have successfully implemented the goals. Defining the vision is about figuring out the type of life you want to lead and the amount of money, riches, and wealth to support the desired current and future lifestyle. It would help to consider how you want to live now, in the midterm and retirement.
Personal Financial and Life Planning Areas
Before you even start to create a vision, you need to know why and what areas of your life need to improve or could improve. Creating a life vision and goals is vital to setting the tone or perspective that guides all other life spheres that help attain your overall image. For a balanced coverage of all essential aspects of your life, you may consider soul-searching and developing goals in the following areas: career, family, finances, education, attitude, time management, retirement, friendships, public service, and relationship with God.
The primary purpose for saving and investing
To achieve your life vision, you need an income, savings, and investment plan and the implementation of the plan. The two primary reasons for saving and investing are to multiply money and create income streams to support current living income and to create cash or income-generating assets for retirement income. We also save to make money, riches and wealth for comfortable present and future living and to leave an inheritance for our children. We do this because we cannot predict the future, and it is necessary to put some money aside to have a safety net for needs in the present and the future. The other essential purpose for saving and investing is to create passive income for when one will no longer be able or want to work to earn a living income. This saving can provide financial independence, security, and peace of mind, knowing you have a realistic chance of dealing with the unknown during work and retirement. Passive income is earnings you get regularly but have no active role in its generation. Examples are rent, dividends, and pension. Saving money for retirement is a way of preparing to depend on yourself. If you have no cash in retirement, you will be a burden to people and may lead a stressful life.
Reasons for saving and investing
Saving requires willpower or discipline and a lot of careful planning. It requires sacrificing and forgoing consumption now, particularly the unnecessary luxury type, to save for comfortable consumption in the future. Impulsive spending and a laissez-faire life, usually the sturdier forces, will prevail if you have no purpose for saving. A saving and investment purpose will provide a power you can summon to stay on course when things get tough. Whatever the purpose of saving and investing, you need to define and have goals to motivate you to start this journey. Without these, there will be no compelling force to start and continue saving and investing. The reasons for saving include multiplying and growing money, protecting money’s value against inflation, creating multiple streams of income, having peace of mind, creating an emergency fund, buying an asset and household goods, creating an education fund, creating a fund for more significant investments, create retirement income and leaving an inheritance for children.
Budgets
Once you identify the aims for saving and investing, the amount required to achieve each goal category and when the money is needed for each goal, you can prepare budgets. You prepare a spending budget containing amounts necessary for meeting current needs and wants, quantities for saving and investing to attain goals and another budget indicating amounts needed for life in retirement. The third budget contains values and types of assets that need to be acquired to generate passive income for living in retirement. Such assets could include a pension, an annuity, company shares, long-term treasury bonds and rental property.
Identification and generation of income
The above budgets allow you to see how much income is needed to sustain current needs and leave money for saving and investing to create cash for achieving medium- and long-term targets. To put together the necessary income to fund the budgets, you need to consider several factors, including current income, potential sources of additional revenue and appropriate investment vehicles, portfolios and opportunities, taking into account the investments’ potential returns, liquidity and maturity periods and aligning these with the needs of the targets. Investment portfolios include cash bank deposits, Treasury bills and bonds, stocks/shares, money market and real estate. Investment targets need time to attain, so you need to start saving and investing early.
Implementation and monitoring
Making a personal financial plan does not yield the desired results until you implement it successfully. So, you must set up SMART (specific, measurable, attainable, relevant and time-bound) steps to implement the plan daily to achieve the set aims. An effective tool for this is a spending budget that you regularly evaluate and interrogate variations from the plan to correct them to keep the plans on course. Monthly assessment is the norm. Effective implementation also requires actively seeking income to close gaps if your income and expenditure are not balanced. Often, expenditure is more than the corresponding income, so you must find ways to remove unnecessary or excessive expenses.
Estate planning
No personal financial and retirement planning is complete without estate planning. Estate planning defines how you want your assets to be managed and preserved during your lifetime and how you want them disbursed after your death. The plan also identifies the person who will look after your estate before or upon your exit. If you die without an estate plan, the State winds up your estate through probate. A probate is a legal process that courts use to wind up a dead individual’s assets and liabilities according to the deceased person’s will or the state law if there is no written will. You can protect your assets by setting up a Corporation, Limited Liability Company, Limited Liability Partnership, a Living Trust and Wills.