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Basics of Financial Planning

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What is financial planning? For anyone who needs a quick explanation, they could simply open google and do a quick search. A few line items down, Google would pop something out like: “A step-by-step approach to meet one’s life goals”, or “A comprehensive picture of your current finances”, or my favourite, “Financial planning … it’s unlikely that your financial position will remain the same throughout your life”.  It can all seem a bit confusing, especially to those who might not have a financial background. Simply put, financial planning is comparing your business’s current financial situation to your long term financial goals. This is so vitally important, not just to businesses but to every single individual in their personal capacity as well. Failure to do even a basic financial plan could lead to cash flow problems, failure to meet tax and other compulsory monetary demands, overspending and ultimately failure to reach your business and personal goals. So let us look at what a basic financial plan would entail.

1. Understand your current financial position

This entails making a list of assets, debts, income and expenses. Once your lists are prepared, compare your debts to your assets and your expenses to your income. If your debts are greater than your assets, this means that your assets are insufficient to pay your debts. Should your expenses be greater than your income, this could signify cash flow problems. This overall picture is the foundation you will use to create your financial plan.

2. Set your goals

Once we know what our financial picture looks like, we will set our financial goals. Each person and organisation will have their own unique set of goals based on the specific financial picture. Your goals set should be realistic and should be set for both the long term and short term. Common goals would be to pay off debt, establish an emergency fund, save for retirement and plan for some downtime. Once your goals are established, you would use this in conjunction with your income and expense lists.

3. Develop a plan of action

At this point in your plan, you would know where you are financially and you know what your financial goals are. Some will be fortunate enough to be in a favourable position and could continue on their existing path without making any changes. For others, they would have realised that in order to reach their financial goals, they require a change in lifestyle or outlook. For each financial goal, you would need to think about what it would take to meet that goal. Retirement savings take decades to accumulate. Perhaps you would need to increase your savings category or deposit a lump sum into your retirement plan. For more short term goals it could just entail going through your expenses and cutting down on unnecessary costs. Budgets should be drawn up and all areas of excess spending should be curtailed. If opportunities exist for generating further income, now is the time to put that into action.

4. Review and revise your financial plan

Your financial plan should be reviewed regularly. Our financial position, the economy, the markets – these can and will change over time. In order to stay abreast of our financial situation and goals, we need to keep our financial lists updated regularly. Take time to regularly view your savings and investments to determine if they are on track for your savings goals. As your circumstances change, your financial plan should be updated. Income and expense schedules should be reviewed monthly and assets and debt schedules should be reviewed quarterly. Your personal life will change as your family grows or as you face life challenges. It is absolutely imperative that your regularly update your financial plan to keep it relevant and achievable.

Should you find your business or personal situation overwhelming or need further assistance on how to set up a financial plan, please do make an appointment to see a financial advisor or planner. These professionals will assist with wealth management and can assist with drawing up plans or investment strategies specific to your needs.


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