Preparing a Personal Financial Plan

The start of a new year is usually the time when you think about what you want to focus on over the next twelve months. One resolution you should consider adding to your list this year is the preparation of a personal financial plan. A personal financial plan captures an individual’s current financial situation, their financial goals, and a plan of action to achieve those goals. In this post we will discuss the reasons why you should prepare such a plan and provide guidance to assist you in completing one.

Having a plan gives you a better chance of accomplishing your financial goals compared to not having one, and you will also benefit from just going through the process of preparing a personal financial plan. Putting together a plan brings clarity to your objectives, enables you to distinguish targets that are realistic from those that are aspirational and forces you to prioritize goals in order of importance. Furthermore, you will increase your chances of success when you take the time to carefully work out the best approach to accomplish a goal, focus your efforts on following that approach and regularly measure your progress towards the target. Working towards measurable goals and tracking progress enables you to assess whether your plan is working and gives you the ability to adjust as circumstances change.

Most individuals will have multiple major financial objectives over the course of their lifetime including buying a home, educating their children, funding their retirement, and leaving a legacy for future generations. While working towards their goals, individuals may also be forced to deal with unexpected events, such as illness, that can strain their financial resources. It is important to have a financial plan that outlines how you will go about achieving your financial targets and managing the risks you could potentially face. Having a plan can bring peace of mind and minimize the stress and worry that comes from dealing with uncertainty.

The major components of a personal financial plan include an assessment of the individual’s current financial situation, a list of financial goals they would like to achieve, a plan of action to achieve each goal and an outline budget that reflects those plans.

The starting point for a financial plan is to calculate your net worth and net cashflow to obtain an understanding of your current financial situation. Being aware of your financial circumstances will give you a sense of where you are starting from and help you to formulate realistic and well-informed goals. To calculate your net worth, prepare a list of your assets (what you own) and a list of your liabilities (what you owe), then subtract the total liabilities from the total assets. Your net cashflow is the difference between the amount you earn and what you spend, and this can be obtained by preparing a monthly or annual statement of income and expenditure. This is a critical component of your plan as it shows how much cash flow you have available to direct toward meeting your goals as well as the areas of spending that could be targeted if you need to increase savings to fund specific goals. Once this exercise is completed, you should review your situation to identify strengths you can build on and weaknesses to be addressed in the preparation of your plan. An example of a weakness might be having high-cost credit card debt, the repayment of which you should prioritize in your financial plan to save money.

The next step involves setting goals that are at the heart of any financial plan. Prepare a list of your goals and priorities by picturing the future you envision for yourself over the short-, medium- and long-term horizons. In other words, what type of life do you want now, as well as in 5, 10 or 20 years. For this exercise to be effective, the goals you set should be specific in terms of the commitment of financial resources required and the time frame for completion. While goals are unique to each individual, and everyone’s priorities are different, most of us have objectives that include some aspect of the following: major asset purchases such as buying a home, funding significant family commitments including children’s education, building a retirement nest egg, protecting assets against losses due to unforeseen events and passing on assets to family members and loved ones.
Having listed your goals, you then need to develop workable strategies to achieve them. A strategy is a plan of action to achieve a target and represents a roadmap that outlines the path for getting to your goal. For each goal, your plan should include a target date for completion and an estimate of the funds required. If the amount needed for all your goals exceed your current means, you will have to prioritize goals to determine which ones get funded first. Keep in mind that plans are only useful if they are realistic, so it is important to include strategies that you can complete. Planning for most major goals requires research and careful analysis to ensure a successful outcome. See our post on funding your retirement for an example of what to consider in planning for retirement.
Meanwhile, you can ensure your plans are achievable and begin the process of implementing those plans by preparing an outline budget of income and expenditure that incorporates the goals you are targeting. This budget can be done on a monthly or annual basis and should combine your current situation with the strategies you will be undertaking to achieve your goals. For example, if your goals include buying a home and saving for retirement, you should have estimates of how much you currently have set aside for each objective, the amount you would need to save for the downpayment on the home, the mortgage payments that would have to be made after the home is bought and the regular contribution required to adequately fund your retirement portfolio. When you incorporate these amounts into your cash flow budget you will be able to see if your goals can be achieved with your current income and spending pattern, or whether changes are required. You will probably have to go through several iterations before getting to the point where your aspirations and your financial means are in sync.
In addition to planning to achieve your goals, you will also want to build safeguards into your financial plan to ensure you and your family are protected in the event something unexpected happens. One such safeguard is to have an emergency fund that you can draw upon to meet unplanned expenditures or to cover unexpected shortfalls in income. While this can vary depending on an individual’s circumstances, a rule of thumb is to set aside approximately six months expenses as a separate fund, so you don’t have to draw on your long-term savings to cover day-to-day expenses if you have a shortfall in income or incur unusual expenses. I normally advise clients to have an emergency fund set aside before starting to invest so they are not forced to sell investments at the most inopportune time to cover cashflow shortfalls. Another risk management measure everyone should consider incorporating in their plan is having adequate insurance coverage. This includes life insurance coverage for income earners, health insurance to cover medical expenses, as well as disability and home insurance. Having adequate insurance cover ensures losses from unexpected events does not disrupt the other aspects of your financial plan.

While estate planning might be an unpleasant task for many, it is advisable to consider and plan for how your assets are to be distributed after you are gone. Preparing a valid will is how you would specify your wishes, but you can also use joint accounts and beneficiary designations to distribute assets where appropriate. Where two people jointly own an asset, the asset automatically passes to the joint account holder when the other party dies. Additionally, you should be aware of what happens if you don’t put legal arrangements in place for the distribution of your assets. Under Trinidad & Tobago law, the assets of a married person are distributed 50% to the spouse (100% if there are no children) and 50% to the children (100% if the spouse is deceased). Where there is no spouse or children, the estate goes to the parents, or to the siblings if there are no parents, or to the grandparents if there are no siblings, or to other close relatives in certain circumstances.
Moreover, a financial plan must be a dynamic document that changes as your circumstances, your goals or your priorities change. Plans should be evaluated on an annual basis (at the start of the new year might be a good time), after significant life changes, or following changes in your financial circumstances. You can also use the annual review to measure progress relative to targets set and amend targets or tweak plans as required.

In conclusion, even if this post convinces you of the need to prepare a financial plan, it is possible you may find it hard to take the first step to getting it done. It might be helpful to remember that when you plan, you choose the future that you want. Without planning, you may end up falling into a future that you did not choose. Start by writing down some goals and imagine life with those goals accomplished. That picture may give you the motivation you need to take the first step. Happy planning!


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