Strategy for Financial Planning

On this page, we will try to give a simple outline on how you can achieve financial independence by implementing a simple strategy for financial planning. Do not undermine the simplicity of such a strategy for financial planning. In fact the simplicity will be what makes it work. Remember though, "simple" does not equate to "easy". Why do we say that? It all boils down to habits.

Habits can make or break your implementation of your plan. Once, however, you have cultivated the habit of following the plan, the results will be more worth the effort.

With that in mind, let's go on with the outline.

1. Determine your spending habits.

* Look at your expenditures from last year.* Be very clear about what are necessities and what are non-necessities i.e. luxuries. Break them out between necessities (food, utilities, transportation, mortgage payments, rent, etc.) and non-necessities (vacations, hobbies, entertainment, recreation etc.). * Make sure you have at least three months (six months will be better) of cash reserves for emergencies. This will cater for events such as an unexpected job loss or illnesses. * Set aside amounts for planned expenditures such as a vacation or the purchase of a new car.

* Finally, determine ways to reduce your expenditure by at least 10%. This is often easier than you think, once you are conscious of your spending habits and start categorising your expenditure into necessities and non-necessities.

2. Determine your net worth.

* Begin by adding up the value of your assets (house, car, boat, investments, 401(k) or provident funds etc.* Then you subtract the amount of your liabilities (mortgage balance, credit card debt, loans, etc.).* The result is your net worth.

3. Prepare a credit plan.

* As a result of determining your net worth, you know the exact amount and nature of your debt.* You may want to begin by checking your credit score report.* If you have too much credit card debt, create a realistic pay-down plan. We will explain this further in another article. * Find a credit card company that offers the most favorable terms on balance transfers, and use the new account to consolidate your debt balances.* Make sure that you adhere strictly with your pay-down plan.One very important thing to remember here is that whatever "savings" you achieve here with the consolidation should be directed towards the pay-down and not to be used on other spending. This way, you will create an "avalanche" where your debt will be reduced at a much faster rate. 

4. Consider investing

* Write down your long term and short-term goals. This is important as it clarifies your thoughts and intentions what you want to achieve. * Determine you risk tolerance. Go with an investment portfolio that will allow you peace of mind and yet achieve a reasonable amount of return. There is no point in being aggressive in your investment portfolio when you cannot sleep in peace at night when the market dips or corrects against you. * Consider your tax situation. Also consider when you need to rebalance your mix of investments. This is up to the individual. Some people prefer to put their investment mix in the ratio of 70% equities, 30% bonds and will rebalance their investment portfolio to achieve this mix. Go with a mix you can live with. * Do remember though - investments are only means to help you achieve your goals and objectives.

5. Do proper tax planning.

* Maintain good records. Keep receipts.* Consider the tax implications of any major expenditure.* Review your prior year tax returns to become more familiar with the type of income and deductions you typically incur.* Educate yourself. You will be surprised at the amount of tax reductions you can achieve once you are familiar with the tax structure.

6. Get proper and enough insurance cover

* Appropriate insurance coverage is critical to any strategy for financial planning. Do not consider this, I repeat, do not consider this as an unnecessary expenditure. Insurance is a must. It is the "spare tire" that will keep the car running when one gets a "punctured tire". * List whatever insurance coverage you have. * Determine your deductibles, overall limits, co-payments, premiums. This is an area where your insurance advisor or agent will be able to help.

At the end of the day, the main objective to having a strategy for financial planning will be to increase your income and reduce your expenditure. Making a commitment to save more will be a vital first step in the right direction. We will discuss how you can increase your income and reduce your expenditure in another area of this site.

Implementing a strategy for financial planning requires a honest and thorough assessment of your resources, development of your goals and objectives, and making choices and deciding on alternatives to achieve your short, medium and long-term goals. This will certainly not be a end all, be all. It simply is a vehicle which will carry your goals and objectives to fruition, ensure gives you peace of mind knowing that you have done the right thing for you and your family.