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| Financial Planning Is Everyone’s Responsibility |
By Rex Ma. A. Mendoza
Philippine Daily Inquirer
First Posted 20:02:00 02/17/2008 |
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WEALTH management and financial planning have gained terrific levels of popularity in recent times. Financial services professionals have given advice to many affluent individuals and families and have opened doors to great opportunities for growth, prosperity, and financial independence. But is financial planning exclusively for the rich? Must the awareness and responsibility for financial wellness be the domain of those who “have it”? Appreciating the principles of financial planning is a must for everyone, and it may dictate success or failure in reaching personal financial dreams.
Financial planning is defined as the process of meeting life’s goals through the proper management of one’s finances. This definition has many implications. Since different people have different situations and goals, financial planning has to be a very personalized process. No matter what financial status, planning is a worthwhile exercise. Anybody who sets his or her mind to achieve financial stability or success needs a plan.
Contrary to common perception, financial planning can be as simple and as complicated as one desires it to be. It is characterized as a continuous process. It must be dynamic and must always consider shifts in economic positions, aspirations, and lifecycles of the individual or the family concerned.
So no matter what your current financial situation is, and whatever your life’s goals are, you need a plan. This plan will be your blueprint for the achievement of your financial goals. Like any other plan, it sets forth a strategy with which you set your direction to guide you in the future decisions you will make.
The first step is to know what you want. A philosopher once said, “Take care to get what you like or you will be forced to like what you get.” Your goals have to be laid out and specified. Maintaining your current lifestyle, your children’s education, a comfortable retirement, a completely furnished house, a wonderful vacation, involvement in charitable causes, and a second honeymoon can all be important to you. But how do you rank these? What are your priorities? Setting your objectives right is the most crucial first step in creating your plan.
Second, you have to study your financial position. How much income do you receive and what proportion of this do you spend? How much have you saved? In what instruments are these invested? Do you have loans? It will be worthwhile to know how your current situation is and check if it matches the prioritized goals you have established. The answer to this question is critical: Are you on track with what you want to achieve? If your answer is yes, or if you are quite close, then you will not require any radical changes. But if the answer is no, or if you are “way off,” then you will have to either change your lifestyle, reposition your investments, check on your inflows and outflows, thereby effecting a change in your financial position to direct your track towards your goals. Another alternative is to alter your objectives altogether because they may be too unrealistic.
When you have completely analyzed “where you are” and “where you want to go,” you can now evaluate your investment options. This particular step will define the vehicles that you will choose to reach your desired investment targets. In more technical terms, this is commonly referred to as the creation of a “portfolio.” At this stage, you have to differentiate instruments as to their capability to earn (yield), the probability of losses (risk), the time horizon that you will be committed (liquidity), and the taxes that you may be exposed to. These factors are very important in the selection process because there has to be a match between specific goals and the choice of vehicle.
There is no such thing as an ideal investment for everyone at all times. Much depends on your financial situation, risk appetite, investment acumen, and the time frame you have in mind. Another reason why this evaluation is important is the fact that these factors are manifested in varying degrees within a given instrument. For example, a high yield may naturally mean that you will be taking greater risks. It may also mean that you are committing yourself to a longer time horizon. It is ironic that many people focus on earnings alone without thinking of what they are sacrificing in return for that higher yield. On the other hand, too much focus on safety and liquidity may limit what you will earn. This can result to the under performance of your “portfolio” thereby making it difficult for you to meet your targets at your desired timeline. You also have to keep in mind that you have many choices. Savings and time deposits, life insurance, real estate, mutual funds and unit investment trusts, money market placements, and many other instruments are there to build up any investment basket. In the end, matching and balance is the key to portfolio creation.
The commitment to implement an established financial plan will help you avoid mistakes in managing your money. It will strike an equilibrium between what you enjoy today and what you intend to have in the future. Trade-offs between current expenses and savings will be clearer. You have to know that adverse experiences occur on both ends of the spectrum. Overspending and the focus on instant gratification can put your future retirement at risk. However, forgoing things that provide you pleasure can also have optimum timelines. If you wait too long to have that “dream house”, you may have it at a time when your children are all grown. You’ll then risk missing out on the experiences that you can have only if you have enough time to share with each other. A sound financial plan must therefore be able to afford you satisfaction and enjoyment within the entire process. Again, the key consideration will be your own personal situation. What is good for you might not be good for another person.
After a period of time, you will start experiencing changes which will require you to revisit your plan. A career move or an added child might be enough for you to refine your goals, and consequently, your financial strategy. For this reason, a review process may be inevitable every three years. For some, this review can even be done annually. Such a study may result in a new plan, and a new cycle will then begin.
Financial planning is not just for the rich, it is a responsibility for everyone. It creates a crucial roadmap that defines your desired destination and how you intend to get there. It requires awareness, understanding, and commitment. |
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