Financial Planning, Budgets and Savingsadmin
Financial Planning is the process of making conscious decisions about how you use your money. Financial Planning is not simply about helping you retire or purchase investments, Financial Planning can help you improve your day-to-day and achieve goals in life.
There are six steps in the Financial Planning process:
- Establish your financial goals.
What are your financial goals?
- Short-term goals could be something as simple as saving more for your birthday or Christmas, learning how to spend less, and the like.
- Medium-term goals take one to about five years to reach. This could be as large as purchasing a house or a car, renovating your home, or replacing large household appliances like washing machines and refrigerators.
- Long-term goals usually take more than five years to reach. If they involve money, they need a disciplined saving and investing strategy. The most important long-term financial goal for almost everyone is to save for retirement.
Assuming that you will live up to, or beyond, the average life expectancy for Filipinos, which is now set at 78, and you retire at 60, that means you have to fund your expenses for the next 18 years. For some, living on P20,000 per month is enough. In other words, you will need P240,000 per year and for 18 years, you will need P4.32 million (assuming your expenditures do not change)..
To help establish your goals, you can take a look at your needs. Do you have a family? Are you providing for anybody? Are you single? Do you need to move closer to work?
Another thing you can look at is your career trajectory. Do you plan to be an employee for the long-term? Do you want to make a career shift? Do you plan to start a business Do you plan to retire early?
- Understand your current financial situation.
Very simply put, you can just list down your income, savings, expenses, and debts.
Take an afternoon or a weekend to create a budget for your inflows and outflows. Record all of your funds flowing in (salaries, wages, rental income, padala from family members, etc). Evaluate your bank accounts and other investment accounts. Then input all of your outflows which are your regular expenses in a month, in a quarter, a year and possible “surprises”.
*Insert link to budgeting article
Are you spending more than you are earning? Is your income secure? Are your expenses increasing?
An advice: Savings may not also necessarily mean good. Savings alone may not be enough as inflation reduces the value of money over time. And in the same vein; debts are not always a negative thing. Loans can be taken to purchase something that may increase earning capacity, effectively improving your income in the long-term.
- Evaluate your current financial situation in relation to your financial goals.
Now put two and two together. Evaluate how your situation fits with your plans.
- Short-term – If you can save X amount everyday for a week, how will it affect your daily financial situation? Will you have enough to eat and get to work? Will you have enough to enjoy the weekend?
- Medium-Term – If you purchase that refrigerator how will it affect your financial situation? Do you pay for it in cash or in installments? How much interest will you incur if you pay for it in installments? Can your savings take the blow if you pay in cash?
- Long-Term – If you want to retire by X age, how much would you need to have saved? Consider inflation. Also consider, financial products that you can earn interest. How much would you need to save each month to reach your target retirement nest age? Are you earning enough to save this much? Consider other big items you may plan to buy like home and/or a vehicle.
- Create a plan to achieve your goal.
Two main factors affect your goal. Your income and your spending. In a month, do you spend less than you earn? Or do you go into debt just to survive? In this case what can you do? You have two basic options.
- Increase your income – How can you increase your income? You can opt to increase your primary source of income which can be your salary or business revenues. There are many ways to do this, such as obtaining new skills, shifting careers or scaling up your business. This is a case where taking a loan can pay off in the long run.
- Decrease your spending – How can you decrease your spending? One way is set a budget, and stick to it. Also, do not forget to allocate for leisure as to avoid splurging some other time. Budgeting also helps you focus on needs, and avoid wants. Another way is to purchase items that may save you money in the long run. Spending too much on your daily commute? Purchase a cheap vehicle such as an electric scooter.
- Put your plan into action.
Now that you have a plan, you have to implement it. Simple enough? Often this is easier said than done. But the keys are discipline and self-control. Have a future-oriented mind set. Just remember, the sacrifices made today will be for your own benefit in the future.
- Review your plan, adjust accordingly.
Your plan has been put into action, now there’s only one question left to answer. Did it work? Financial planning is rarely ever a static process. Meaning, you don’t just make a plan one day and you’re done. Life changes, unexpected things happen and so you have to be flexible and ready to adjust and adapt your plan.
As with most things in life, planning is important. But finances may be one of the most important things that you will have to plan. Not only to be prepared for retirement, but to be prepared for the unexpected things life will throw at you.