What is Financial Planning?

For many people, financial planning is usually associated with products or even unit trust funds. In reality however, it has a much broader scope.

A comprehensive financial plan covers the following areas – investments, insurance, estate planning, management, taxation planning and others. In short, it involves the process of developing strategies to meet your life goals.

You can appoint a licensed Financial Advisor to help you with financial planning or you may also try to D-I-Y for your personal use. So how does financial planning work? Well, as mentioned, it is a thorough and comprehensive process, but here’s a broad example of the steps involved:

Gather data

This involves listing down all qualitative and quantitative data sets. This is useful as it gives a broad view of your financial situation. At the same time, the information gathered serves as the starting point from which the financial plan will be based upon.

Quantitative data is mainly factual. This includes your income, expenses, assets, liabilities, insurance and personal information like your age, marital status, number of children etc. You may find it useful to come up with your personal balance sheet and cash flow statement.

Qualitative data gathering goes beyond the surface. It addresses issues such as risk appetite or your willingness to tolerate short term fluctuations. For example, do you want to maximise your returns with capital growth or are you happy with a 5 per cent return per annum? Are you concerned over any short term fluctuations in your portfolio – if you are not, most of your investments can be structured to be long-term investments.

Set goals

Next, identify your priorities. These may revolve around buying a house, funding your children’s universities fees or building a retirement nest egg. Classify them into short and long term goals. In this case, the shorter term priority may be to buy your house before saving up for your children’s education fees while building up your nest egg as long term goals.

It is important that the goals you have listed down are realistic and achievable.

For example, it may be your childhood dream to own a summer vacation house by the beach in Italy. But with a salary of RM7,000 a month (and on top of your current financial goals!), in reality your Italian dream may be a bit too fanciful to be included as a realistic goal.

Analyse and strategise

Based on your financial situation as well as the quantitative and qualitative data, evaluation of the information can now be made. Do you have adequate insurance coverage and have you nominated a beneficiary? How much have you been saving for retirement? Have you written your Will? These are some questions which will invariably come up as you proceed through the different areas of financial planning.

Financial ratios can also be calculated to give more understanding. Here are a few examples:

Liquidity ratio: Liquid assets divided by monthly expenses – Indicates the number of months that you are able to endure in case of any emergency situation. The higher the better.

Savings ratio: Monthly savings divided by Gross income – Indicates the portion of earnings that you are saving. The higher the better.

Debt payment ratio: Monthly payments divided by Net income – It shows the portion of earnings that go towards servicing your debt. The lower the better.

For a better overall picture, it is important that these ratios be read together and not in isolation.

Even if certain ratios may fall below what is considered ideal, there could be other plausible explanations.

For example, a person who has bought two properties may score low for his savings ratio and have a higher debt servicing ratio. It may not be a flashing red sign that he is not saving enough as the properties can be treated as his investment.

Nonetheless, if his liquidity ratio is low as well, he should be wary of any cash flow risks that may occur if an unexpected situation occurs ie: he gets laid off from work.

With a better knowledge of your current financial situation, we can move towards developing strategies that will:

1)Kick start the process towards achieving your goals eg: You found out that most of your investments have been laying idle in the bank. To fund your retirement objectives, we have to re-allocate the investment profile to one that better suits your risk and goals.

2)Put your financial situation in order or better lay the foundations eg: You have adequate insurance protection for you and your wife, but you are both expecting a child soon. It is time to take another look at increasing the coverage amount and to extend it to your child.

In some instances, you may find that some of the goals stated earlier may not be achievable.

For example, if your goal is to be able to spend RM5,000 a month when you retire but current projections show that you are unable to do that.

Changes must be made, either to your expectations eg: consider a more frugal lifestyle where you spend RM4,000 a month instead, or to your current investments eg:

Your retirement nest egg is only generating four per cent per annum; by increasing more towards dividend yielding stocks, the returns may hover closer to six to seven per cent thereby making your goal more achievable.

However, if both choices do not seem palatable to you, then your current lifestyle has to be adjusted – you may need to save more now.

If all else fails, you should then consider postponing your retirement or the possibility of working part-time when you retire.

Implement and review

Once you have the strategies in place, implement and carry out the necessary investments, insurance or estate planning without further procrastination.

It is crucial to review your plan at least once a year.

There may also be times when your goals have changed or there are changes to your personal life such as a marriage or the birth of a child.

Besides that, you could have received a substantial pay rise, which affects your spending patterns and consequently your retirement expectations. Or there could be unexpected events like a prolonged rise or fall in the rate.

The key point here is that financial planning is not a product or a one-off outcome which you can ‘plan and forget’.

Financial planning is a continuous process as your priorities and external circumstances change over time. For more detailed information, it is important to consult a licensed financial adviser like Areca Capital.

Areca Capital is a niche Malaysian fund management company. We are a firm believer in the advisory-based approach towards investing.

We help our clients, who range from individuals to corporates, family and private trusts, foundations and other institution to achieve consistent risk-adjusted returns over the long term.

For any enquiries, you may contact us at 03-79563111 or by email: [email protected].

What do you think of this story?
  • Great (0%)
  • Interesting (0%)
  • Surprised (0%)
  • Angry (0%)
  • Inspired (0%)

Source: Borneo Post Online

Leave a Reply

Your email address will not be published. Required fields are marked as *

Time limit is exhausted. Please reload CAPTCHA.