Everyone has a source of living through which funds are generated to offset life’s demands covering every day’s needs and making provisions for future needs.
For affective accomplishment of personal and family comfort and happiness through the provisions of basic needs and to a larger extent comfort and attainment of future set goals, certain measure must be taken and followed to fruition.
What is financial planning?
Finance is defined by the oxford dictionary as the management of large amounts of money, especially by governments or large companies, while finances is the monetary resources and affairs of a state, organization, or person. The word financial relates to finance, while Planning, according to oxford dictionary, is the process of making plans for something.
Goggle defines financial planning as the task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set.
Financial Planning is an ongoing process to help you make sensible decisions about money that can help you achieve your goals in life; it’s not just about buying products like a pension or an ISA.
The financial planning process is a logical, six-step procedure: (1) determining your current financial situation. (2) developing financial goals. … (5) Creating and implementing a financial action plan, and. (6) reevaluating and revising the plan.
The Importance of Having a Financial Plan. Creating a financial plan helps you see the big picture and set long and short-term life goals, a crucial step in mapping out your financial future. When you have a financial plan, it’s easier to make financial decisions and stay on track to meet your goals.
What is a ‘Financial Plan?’
Investopedia defined financial plan, as a comprehensive evaluation of an investor’s current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans.
Most individuals work in conjunction with a financial planner and use current net worth, tax liabilities, asset allocation, and future retirement and estate plans in developing financial plans.
These metrics are used along with estimates of asset growth to determine if a person’s financial goals can be met in the future, or what steps to be taken to ensure that they are actualized
Elements of a financial plan
Financial goals: A financial plan is based on an individual’s or a family’s clearly defined financial goals, including funding a college education for the children, buying a larger home, starting a business, retiring on time or leaving a legacy. Financial goals should be quantified and set to milestones for tracking.
Personal net worth statement: this has to do with a representation of assets and liabilities which serve as a benchmark for measuring development towards achieving financial goals.
Cash flow analysis: This involves an income and spending plan and it determines how much one can set aside for debt repayment, savings and investing on monthly basis.
Retirement strategy: This plan includes a strategy for achieving retirement independent of other monetary priorities. The plan should include a strategy for accumulating the required retirement capital and its prearranged lifetime distribution.
Comprehensive risk management plan: Identify all risk exposures and provide the necessary coverage to protect the family and its assets against financial loss.
The risk management plan includes a full review of life and disability insurance, personal liability coverage, property and casualty coverage, and catastrophic coverage.
Long-term investment plan: Include a customized asset allocation strategy based on specific investment objectives and a risk profile. This investment plan sets guidelines for selecting, buying and selling investments and establishing benchmarks for performance review.
Estate plan: This planning has to do with arrangements for generating and distribution of assets with major focus towards minimizing settlement costs and taxes.
Review and update estate panning instruments, such as wills, inter-vivos trusts, power of attorney, medical directives, and marital trusts.
Goggle defines inter vivos trust as a fiduciary relationship used in estate planning created during the lifetime of the trustor.
Also known as a living trust, this trust has a duration that is determined at the trust’s creation and can entail the distribution of assets to the beneficiary during or after the trustor’s lifetime.
Tax reduction strategy:
Identify ways to minimize taxes on personal income to the extent permissible by the tax code. The strategy should include identification of tax-favored investment vehicles that can reduce taxation of investment income.
Benefits of financial planning
BlueShore financials report available to Daily Times Nigeria enumerates benefits of financial planning embarked upon with the help of expert financial advisor
It’s possible to manage income more effectively through planning. Managing income helps you understand how much money you’ll need for tax payments, other monthly expenditures and savings.
Cash flow: financial planning increases cash flows by carefully monitoring your spending patterns and expenses. Tax planning, prudent spending and careful budgeting will help you keep more of your hard earned cash.
Capital: An increase in cash flow, can lead to an increase in capital. Allowing you to consider investments to improve your overall financial well-being.
Family security: Providing for your family’s financial security is an important part of the financial planning process. Having the proper insurance coverage and policies in place can provide peace of mind for you and your loved ones.
Investment: A proper financial plan considers your personal circumstances, objectives and risk tolerance. It acts as a guide in helping choose the right types of investments to fit your needs, personality, and goals.
Standard of living: The savings created from good planning can prove beneficial in difficult times. For example, you can make sure there is enough insurance coverage to replace any lost income should a family bread winner become unable to work.
Financial understanding: Better financial understanding can be achieved when measurable financial goals are set, the effects of decisions understood, and results reviewed. Giving you a whole new approach to your budget and improving control over your financial lifestyle.
Assets: A nice ‘cushion’ in the form of assets is desirable. But many assets come with liabilities attached. So, it becomes important to determine the real value of an asset.
The knowledge of settling or canceling the liabilities, comes with the understanding of your finances. The overall process helps build assets that don’t become a burden in the future.
Savings: It used to be called saving for a rainy day. But sudden financial changes can still throw you off track. It is good to have some investments with high liquidity. These investments can be utilized in times of emergency or for educational purposes.
Ongoing advice: Establishing a relationship with a financial advisor you can trust is critical to achieving your goals. Your financial advisor will meet with you to assess your current financial circumstances and develop a comprehensive plan customized for you.
Financial planning enables the planner to be disciplined in debt management both for good and bad debts. Trying as much as possible to manage debt, as wealth accumulation involves savings.
It should also be noted that total net asset is, total assets, less loan or any other debt. Having a robust total net asset helps to drive financial planning to its peak.