Financial Planning

Why a financial plan? Well, if you want the best results out of any endeavour – be it going to battle or having a New Year party, you should have a plan. So it should be with investing your money.

It is often said, most people don’t plan to fail, they just fail to plan.

Financial planning not only tells us where we stand financially right now, it also works out where we want to be in the future through setting our financial goals, and it enables us to reach our financial goalposts in an efficient financial manner.

This section helps you to put together a financial plan.

Assess Your Financial Situation
Before embarking on any investment plan, you need to assess your financial situation, i.e. take stock of how you are financially, so that you can decide how much you can afford to save and put aside for investments. It could be that right now you just spend on whatever you want and whenever you want, without any idea of how much or how little you end up with at the end of each month.

To determine your financial status, you have to:

First, compute your net worth
Your net worth is your personal equivalent to a company’s balance sheet and tells you how healthy you are financially. To calculate your net worth, you need to list down your assets and your liabilities. Then subtract your liabilities from your assets to arrive at your net worth.

Your assets will include items like your cash, bank accounts, possessions, existing investments if any, like shares or unit trusts, and your fixed assets, such as properties.

Your liabilities include any loans that you have taken (car, house or even loans from family and friends), your credit cards and any other debts you might owe. If your arithmetic works out to a negative net worth, then you are insolvent. Forget about investing for the time being and work on how to turn it positive. If your arithmetic gives you a positive net worth, that’ s good but unless your net worth is already sufficient for all your future needs, you would want to improve the figure so that you can have more to invest.

How can you increase your net worth? One way is to reduce your expenditures. Any excess cash over expenditure can then be allocated among your assets to improve your net worth.

But which expense to cut? To determine this, Do your cash flow statements next You have to work out where your income goes to; in other words embark on a cash flow analysis of your earning and spending patterns. First organise all your salary statements, receipts, bills, tax returns and other financial data into a clear record of how much you earn and how much you spend each month of the year.

List down and scrutinise each item of your expenses to see which ones can be trimmed so that at the end, you will have a positive cash flow – that means more money coming in than going out.

Some of the items that go into, and questions you should ask, while doing your cash flow exercise include:

On your income: What is your salary? Do you have any other sources of income – from part-time jobs, dividends, rental income, bonuses. If you are doing the analysis for your whole family, you want to include your spouse’s incomes too.

On the outgoing flows: These cover your household and living expenses like food, clothing, and utility; your car maintenance and petrol; loan repayments for car, credit cards or house mortgages; insurance premiums; education and medical expenses, entertainment and holiday expenditures; income tax payments, etc. etc. You get the idea; the list is a long one.

Here is where you have to decide which expenses are necessities and which are just plain frivolous – and cut the latter out of your spending habit, so that you can save more.

Draw up a budget to keep your expenditures in line. The budget will be a check on what you can afford. For instance, you can’t afford fine dining in posh restaurants on a weekly basis if what you have is a coffee shop type of a budget; although on a rare occasion like your wedding anniversary, you might want to treat yourself so also budget for the occasional splurges. But keep these to a minimum.

If you are drowning under voluminous financial data while trying to get organised, be aware that you can get a helping hand from computer technology. The mainstay to organising your finances in today’s world is computer software packages, which are designed to help you control your finances. Most programmes will help you create a budget and track your expenses, even calculate how much you should save for investments and monitor your investments.

Once you have your finances under control, the next step of financial planning is to:

Set your Financial Goals
A simple way to setting financial goals is to plan ahead for two years, five years, 10 years, 20 years and so on. Next, think of the needs and wants you (and your family) have, and translate them to become a specific goal for each of the time frames.

Your goals could range from the obvious (like a house in five years, or your children’s university education in 10 years or a nice nest egg upon your retirement), to things you keep promising yourself but you never did have them (like riding the Oriental Express train on your next holiday abroad). However your goals should be specific, appropriate, worthwhile and not pipe dream fantasies.

Next, compute how much money each goal is going to require. Don’t be intimidated by the sum. Unless you have massive sums saved up, most of us are going to have to earn the additional funds to realise our goals – and these funds will be acquired through your investing efforts.

After all, this is what this website is all about – to learn how to invest wisely so that we will earn the returns to realise our goals.

Develop Your Investment Programme
Now that you have set your goals and have cleaned up your finances to produce some true surplus money for investing, there’s one more thing to do before you take the plunge. Many financial planners advise us to set aside at least three to six months expenses to take care of financial emergencies (like losing your job) or unexpected cash flow problems, before venturing out to invest in anything. A man with a family is sometimes advised to save up to one year’s cash reserve.

Once this emergency buffer is in place, you can consider how much of your surplus income to use for investing so as to achieve your financial goals. You could start small and increase the amount once your surplus funds build up, or you could start with a portion of your big savings and increase your funds for investing, once your confidence builds up.

Asset allocation: Divvy up your investment pie
The next question that confronts you is what assets to invest in? Should you buy shares or bonds? How about government securities? Unit trusts? Property? Or be adventurous and dabble in futures?

Well, you have to do your homework. First, find out what investment products are available to you, how each works and how risky it is. (For a start, you can click on Investment Products in this website.) When you are researching an investment, you are typically researching a company or organisation, because they are the ones issuing the stocks, the securities, the unit trusts, the bonds etc. There are masses of information out there, in the media and online and from the corporations themselves that enable you to take a closer look at them. It is essential that you know their product, performance, market, competition and industry so that you can make a fairly good prediction as to their future prospects. Why? Because your investments are based on the future.

You should not just invest in one specific asset; to make your investment work, you should choose a combination of asset classes or a selection of specific assets within one asset class (like investing across different sectors if equities are your one asset choice). In other words, diversify. Determining how much of your investments you are putting into each asset class to make up your investment portfolio is called asset allocation.

For you, the overall right asset mix will depend on your goals, the time span to reach those goals, the amount of money you have available to invest and your age.

If you have a long-term plan with a goal of seeing your primary school kids to university, you can start with an aggressive approach where you place a higher percentage of your investments in equities. But if your time horizon is shorter, you would want to be moderate and lean towards an even split between equities and the safer bonds. If your investible fund is pretty small, it will dictate that you chose unit trusts. Your age counts too. Generally the older you are, the more conservative you should be in your investments, and your focus should shift to income-producing investment products like bonds.

Underlining all these considerations and which investment approaches you should take is the biggest determinant of them all – risk – and hence your tolerance for risk as an investor is very significant. In fact your investment into the specific assets within each class is driven to a large extent by your ability to stomach risk. So please refer to the section on Risks, Rewards & You to understand this very important investment concept, before you finalise your investment choices.

Finally do also ensure that you have sufficient life and health insurance so that your family has a financial safety net, should you become very ill or die and cause your investment plans to be in disarray.

Put your programme into action.
If you are all set to put your investment choices into action, when is the best time to kick off?

The earlier the better.
The whole idea is to start early so that you have more time to make your investment grow. If you are young, you have the head start. If you should be in mid-career, you can still reach your financial goals – it is just going to require more ringgit to get there. Even if you are close to retirement, don’t think it is too late. Remember, better late than never!

When you start, don’t invest blindly.
Catching the right train at the right time is most important if you want to arrive at the right destination at the right time. Buy what you know. If you don’t understand a particular investment, don’t dive into it yet until you have grasped all the concepts. Think and act rationally to buy low (and sell high). Don’t let greed overcome your sense of reality, for example, buy shares at too high a price, (or refuse to sell because you want more profit).

Avoid acting on rumours.
Very often there is market talk about certain share prices on the rise. Everyone then jumps onto the bandwagon “pushing” the shares. The strong buying causes the prices of the shares to rise significantly, allowing the parties that started the rumours to unload their shares at a higher price. Can you guess who is left holding the shares at a high price?

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