Starting Your Financial Plan – Your Dreams Into Reality
Financial planning refers to the process of allocating or structuring your finances according to your needs. It includes a range of activities like retirement planning, life insurance needs-estimation, budgeting and portfolio diversification. Structuring your finances systematically is designed to assist you in reaching financial goals and minimizing certain risks that we all face. These include the risk of outliving your savings, medical risks and the eroding effect of inflation.
Starting your financial plan – Your dreams into reality
Goals are very powerful. Ultimately, goal-achievement is indicative of the success of any plan. At the genesis of the financial planning process, it is necessary to specify your financial objectives. You must ask yourself questions- some of which may appear stupid initially- like:
a) Why is money important to me?
b) What is most important to me generally?
c) What’s more important to me- financial security or wealth accumulation?
Financial goals empower budgeting, determine asset allocation and investment strategy. Arguably, the most important role of goal-establishment in the planning process is ensuring that you are motivated to adhere to your plan.
Building your financial plan- The concept of a financial pyramid
Once you have determined your financial goals and what you value most, you have to build a financial pyramid to these specifications. The financial pyramid is just like a tangible pyramid in that you must also build from the base. Therefore, “Where should I invest?” should not be your first question. The financial pyramid can be thought of as being divided into two parts. There’s a base that consists of protection products. The summit comprises accumulation products. Ironically, the base acts as the umbrella that covers your entire financial plan. Starting a financial plan at the top would be like building a glass house on sand.
The building blocks of the financial pyramid
The categories of protection products that form the base of the pyramid include:
a) Health insurance
b) Disability protection
c) Emergency funds
d) Life insurance
The idea behind the financial planning pyramid is to acquire these according to your financial goals, needs and priorities. Only then should you delve into investment, which would help you accumulate wealth and protect you against inflation risk and longevity risk. Your accumulation products would be divided into three basic categories:
a) Cash options – these include liquid savings and investment like the ISA.
b) Income options – These are less liquid, but provide higher returns. Money Market Accounts, fixed annuities and treasury bills are included in this category.
c) Growth options – These are the riskier investments that are potentially more rewarding like stocks and mutual funds.
The concept of the Financial Pyramid is critical to Financial Planning. Adhering to the concept facilitates portfolio development through asset creation, asset protection and asset allocation.
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