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| Understanding Financial Planning |
We all have goals and aspirations, whether to buy that dream home, save up for a comfortable retirement or to bequeath a substantial sum to our loved ones. This is where financial planning plays a crucial role. It has too often been neglected by people who easily assume that pension fund savings will be able to finance all their future needs.
But what is evident from the recent past, is that relying solely on pension funds is unlikely to be adequate to meet all our future needs. So many pitfalls lie in wait for us, such as the rising cost of living, turmoil in the financial markets, or economic downturn. Any of these things can have a serious impact on our personal finances and affect our income and ability to save for the future.
This is where financial planning plays a crucial role. By planning our finances, we aim to remove as much uncertainty as possible from the equation. The immediate aim should be to live comfortably within our means by ensuring that our lifestyles are appropriate for our incomes. This means that our expenses should never exceed our income. And with our surplus funds, money can then be set aside to accumulate future wealth as well as insure against undesirable contingencies.
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Getting Started
It is important to understand that financial planning is not just for the rich, but is absolutely for everyone who thinks seriously about their future needs. To help you understand how financial planning really works, we can break it down into a 4-step process as follows:
- Define your goals
- Formulate a plan
- Implement the plan
- Review regularly
Step 1: Define your goals
We all have certain goals in life, be it a comfortable life after retirement or ensuring sufficient finances to put our children all the way through university. These may be our long-term goals but along the way, we may also have interim goals to upgrade our homes or to be able to have a dream holiday. Whatever your goals are, a financial plan will help to lay out a proper framework and roadmap for achieving these goals.
Step 2: Formulate a plan
Now that we have defined our goals, the next step is to formulate a plan that will achieve these aims. One of the most powerful elements of any financial plan is time. By planning early, you can minimise the chances of not accumulating enough funds to meet your long-term goals.
Step 3: Implement the plan
Both steps 1 and 2 sound simple in theory, but the tricky part is always putting things into practice. This is the third and crucial step that has to be implemented properly in order for the plan to work and meet its desired objectives.
Step 4: Review regularly
Your final step is to conduct regular reviews of your financial plan in response to changing circumstances. For instance, you may have a new addition to the family, or have earned a recent promotion with a substantial increase in salary. Such events may carry major implications for your finances. Therefore, you require a comprehensive review of your financial plan.
Apart from these ad-hoc reviews, holding annual or semi-annual reviews on a regular basis is also important from a holistic viewpoint. Regular reviews allow the opportunity to determine whether your previous insurance cover is adequate for future contingencies. It also allows the opportunity to review the performance of your investments against market and personal benchmarks. Altering and rebalancing your portfolio is often a necessary part of re-aligning your investment returns with your desired objectives.
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To get know investment tips, you can also visit the SFC's InvestEd website.
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