Financial planning is a process that involves breaking down of one’s expenditure bound by the person’s goals and resources. It involves long-term projection on one’s finances so that he makes a good return on investment in the face of either turbulent or stable economic periods. However, for this process to work it depends on the financial goals that have been set, one’s career path, the resources available, one’s risk preference, where one expects to acquire additional resources, what one plans to do to meet those goals, how he will evaluate whether he is making progress, and what he intends to do after that.
Before setting your goals, “it’s crucial for you to establish your financial position in terms of how much debt you owe your creditors, the assets you have and their fair market values, and how much cash you need to run your day to day operations” (Wood 123). Besides, as you establish your financial goals, your partner or friends may lure you into their opinions but it’s worth noting that you are obliged to making them a success. These goals involve deciding whether to spend most of your current income or save your income and later venture into a viable project. During this decision making process on which goals to pursue, it’s important for you to differentiate between your needs and your wants. In this case, your needs are things that are necessary for your survival whereas wants may include things that aren’t necessary, better termed as luxury.
These goals may involve one buying an insurance policy that shall safe guard contingencies that show up without expecting them such as destruction of assets and sudden death. In addition, one can make regular payments to a pension scheme so that he might be able to sustain himself when he retires from employment or make regular remittances into a home ownership savings plan so that he acquires a home in the future and avoid paying monthly rent to his tenant.
Moreover, to manage this financial planning process prudently one has to take a particular career path. Before this takes place you have to identify where your interests are placed and this may be either in people or in money. The love of money sways one into those investments that shall see him gain good returns come rain come sun shine. If you are interested in making money then is need to pursue for a Chartered Financial Analyst certification that gives you knowledge on stocks, bonds and mutual funds and their inherent risks.
However, if you are interested in people and through them you make money, then it shall be wise to pursue interpersonal skills and communication skills. These skills helps one to understand people’s personality, how they react to different situations, their strengths and weaknesses, hence be able to serve them appropriately. Besides, if you want to get potential clients in your future business prospects, working in a bank introduces one to various people of different disciplines and this provides a good exposure. Later on when you want to start your own business, you will find it easy since you will be conversant with a number of those clients and thus engaging them in your business deals won’t be a problem.
In addition, it’s important to know that in any environment you can’t work alone and succeed especially the business industries. You need suppliers of both products and services. For instance, if you are looking for a given insurance policy, then it would be prudent to seek for the services of an insurance agent. These agents shall give you a wide list of insurance companies with a numbers of related policies that conveniently meet your needs. Moreover, if you want to transact in securities most stock exchanges requires one to do that through a registered investment advisor or a broker, so as to reduce the number of companies and individuals trading directly with them.
Planning for your tax liability is very important in financial planning as it may help you avoid being sued for non compliance with the tax law and be required to pay for heavy penalties. It’s crucial to note that if you are married and your spouse files her returns separately, then both of you can claim for personal exemption and also there are incomes one gets that are tax exempt such as those acquired outside the tax jurisdiction and for gifts received by the tax payer. Hence, when one plans for his/her tax very well he is able to reduce his tax liability significantly.
On the other hand, many people define success differently. Some perceive it as having a lot of wealth at a particular point in time whereas others say it’s more of how having money has made you to provide services to your family and the society at large. Success however defined it should reflect an aspect of giving back to the society. To be continuously successful then one has to choose his associates very well. There are those businessmen and other people in the society who have succeeded over time in their fields. Such people are quite inspiring and educative when it comes to helping you get into a successful career path. Through interacting with them you will be educating yourself continuously enabling you to be competitive and keep up with the changing times that determine whether one is successful or not.
Some careers go hand in hand with a particular dressing code, language and communication skill. For example, working in a bank requires you to put on official clothing such as suits but working for a music production centre goes well with casual outfits. Hence before anyone plans to undertake any career path it’s crucial to look at its implications in terms of finances and requirements.
In addition, when one is planning for his finances he has to identify his financial sources and these include external and internal sources. External sources include long term loans, credit cards, gifts, and borrowing from friends and family whereas internal sources include personal savings and income from sales in case of a business. People seek for external sources as alternative or additional sources of finance when they cannot fund projects using their incomes especially where one has prospects of expanding his business. If it’s a long term loan, there is need for him to have collateral that acts as security against the loan that is, if he does not pay it back to the bank as per the terms of agreement he risks his assets (collateral) being auctioned to recover the loaned amount. At the end, the borrower is expected to pay a given interest and the principle amount of the loan. The interest rates may vary depending on the prevailing economic climate that is highly influenced by inflation and monetary policies. Therefore before one opts for a long term loan he has to assess the reliability of his remittances to cover it in the long run and secure his assets from being auctioned.
A credit card is a short term financial source that enables a person to withdraw money from his account below the accounts limit but pay back with a given interest. It’s very useful in emergence situations that one succumbs to when he has no cash to cater for his up keep and when his debts become due. On the other hand, credit cards have led many people to become bankrupt where much of their salaries are cut to cover up the interest and principle amount the card. Besides, of late many people have become victims of robbery where their credit cards are forged and used to withdraw cash from their accounts without by thugs. In spite of all these problems, if used prudently, credit cards are at times beneficial to the users.
Another source of finance is borrowing from friends and families that are well of financially. However, for them to lend you their money you must be a person of integrity and honesty so that they can entrust their money on you. The money lent can be paid later with an interest or just the principle depending on the terms of agreement between the lender and the borrower. The risks inherent in this source of finance are upon the lender especially where there is no collateral to secure the funds and depending on the amount lent, the lender may opt not to sue the borrower when the benefits are less than the costs of filing the case in a court of law. In this case, the two parties may go separate ways and become great enemies.
The other sources of finance are gifts that we receive from others when we have achieved some goals. They may be in form of cash or non cash. If they are in non cash forms, the receiver of the gift may trade it for cash and this cash may be a good source for business funds. When people participate in international Olympic Games, they are usually awarded with some gifts and this has seen many of them become millionaires who have ventured into various investments. Hence, if you are a participant in such games you can plan for future finances that you will get from these activities.
On the other hand, one can acquire money from internal sources such from his savings and income from sales. Many people make savings over a long time and when the savings are deemed sufficient they are then put into viable investment projects. Although putting money into a savings account isn’t easy especially on a regular basis as it calls for discipline and prudency in handling your finances. Also, one can save money through bargaining when making purchases especially of equipments (sofa sets, cupboards and dining chairs) and other assets (Cars and machinery). These purchases may come with discounts and this together with other savings accumulates enough funds to be put into an appropriate use. Besides, one can raise money through retained earnings set aside from the income that comes from sales, that’s if he runs a business. Making use of retained earnings to expand your investments or fund a totally new project is good source of cash with less cost implications.
It’s important to determine how long you will make use of external borrowings because long term use of such sources may cost so much. Hence, when you make your choices look at the future and determine ways in which you can be able to be self sustaining in terms of funding yourself without necessarily relying on other outside sources.
Moreover, every investment choice one pursues has a risk. There is usually less risk when it comes to putting your money in a savings account as compared to investing in equity shares. Although savings have less risk, the interest obtained from them is relatively lower than the returns gotten from equity shares. The returns from investment in shares at times are determined on speculative basis and hence one can decide to sell his shares when he thinks that a certain factor like climate change would affect a particular cash crop like tea which is the main source of income to the company in question. As a result, if the market price of the share at the current period was at a higher margin and the shares are sold, then the shareholder obtains a higher return on investment. However, if he is speculative of the possibility that the climatic conditions won’t hamper the company’s future income and opts to hold on, then he stands at a chance of losing heavily thus making such investments risky.
In these circumstances, the shareholder could have significantly reduced the risk by diversifying his investment portfolio. For this diversification to work effectively, the shareholder is supposed to invest his money in about fifteen to twenty stock from different companies. This approach helps him to spread the risks involved in the stock exchange in the sense that, if one stock fails in a certain company as in the case discussed above, then the trader stands at a chance of not losing heavily but has an option of gaining from companies whose businesses aren’t affected by climatic changes such as those in the oil industry.
In addition, investment in treasury bonds, mutual funds, and debentures has much less risks than the options discussed above. For instance those who invest in bonds are assured of a given percentage of interest annually and finally the principle amount at the end of the period. Besides, the bond holder has the option of withdrawing from the transaction any time without being subject to a fine as in the case of fixed deposit account where one is charged an interest for withdrawing from the account before the agreed period is over. The security inherent in the treasury bonds is subject to the fact that the state government can’t become insolvent as in the case of companies. This is because the government has various options of raising finance when in economic crunch. The sources range from raising taxes, fees and fines to borrowing from the International Monetary Fund and World Bank.
On the other hand, money placed in mutual funds also has controlled risks in the sense that these funds are managed by Chartered Financial Analyst certificate holders who are highly skilled and knowledgeable in finance. These analysts analyze and evaluate a number of options before deciding which alternative companies or projects to invest in that shall maximize the wealth of their customers.
Another option that has fewer risks involved is investment in debentures. Shelley defines a debenture as “an unsecured debt instrument where the holder funds a given company in exchange for regular interests whether the company makes profits or not” (78). It’s unsecured in the sense that in the sense that there is no physical asset or collateral secured against it. In case of insolvency of the company, the debenture holders are settled first. Another advantage is that, this debt instrument reaps relatively higher returns than bank deposits and treasury bonds. However, nothing is only beneficial but it must have a disadvantage of its own and in light of this, debenture holders have no control on the management of the company since they lack voting rights and in case of bankruptcy of the company, they are only compensated up to the value of the shareholding in the company even if they had funded it more than the value of its stock.
After analyzing all of the above discussed options of projects and sources of finance, you have to establish how you are going to meet your goals. This may start by identifying a reliable certified financial planner and giving him/her your investment alternatives so that he can help you to prioritize them. For instance, if you lack enough funds to purchase an asset such as home furniture, it may be prudent to use a short term loan or hire purchase than going for a long term loan. These investment analysts shall help you to forecast the future of the economy so that you can make wise decisions that will enable you to avert some risks that come with heavy losses. For example if you will be dealing in a bakery or welding business then the analyst may advice you that it would be proper to insure your business against unprecedented fire outbreaks.
Besides, to achieve the goals in line with investment in stocks, the investment analyst will help you to diversify your portfolio so that you are able to spread your risks effectively. However, outsourcing these services of the analysts can be costly at times but the experience you are going to gain by working with them shall give you adequate exposure and this will place you at a better position because in the future you can analyze investments on your own and even extend the same to your friends but not on commercial basis unless you are trained and get registered.
Indeed in any kind of planning there should be control and evaluative measures put in place to measure the degree of compliance with its goals and objectives. When an individual has prepared his financial plan, he is required to keep on evaluating it from time to time right from the commencement of a particular project through its implementation to the end of it. If there are any flaws then the plan has to be adjusted appropriately to cater for such contingencies. Any proposed course of action is assessed for its pros and cons, for instance, investment in shares carries a great risk in terms of financial losses but it’s worth noting during the evaluation of this kind of investment that, investments that have high risks comes with good returns compared to the safe ones such as interest from bank savings. There should be a trade of between one project against another. For example, one can forgo an option of putting his money in a savings account and go for a debenture in a reputable company because a debenture provides higher interest rates relative to those of the bank savings.
In addition, evaluation can be based upon the set targets and measures that justify the compliance or non compliance with the goals of a given business venture. For instance, the target could be increment of the business profits by 10% by the year end and the measure could be increased market share and customer loyalty to the company services or products.
If certain objectives aren’t met, then “you can decide to either continue using the same plan when the project wasn’t implemented as per the plan, modify some of the project’s courses of action to accommodate any identified flaws or change the current plan completely” (Collins 68). However, changing the plan completely may expose you to so much loss as already you have spent a lot of money on the investment as compared to the losses you are likely to incur in the face on modifying the plan or re-implementing the same plan. Hence, whichever approach you give to your evaluation procedure there is need to consider the opportunity cost inherent in any alternative preferred over the others.
Finally, after all the above factors have been considered, it is very crucial to project where you shall start from subject to the goals that you have identified, the resources at your hands, your strengths and weaknesses. At this stage it’s worthwhile to make up your mind and embrace courses of action that shall increase your financial knowledge and skills that will help you to counter your weaknesses effectively. These may range from enrolling in an institution that trains management of finance that shall lead you to acquisition of a chartered financial analyst certificate to talk to those you consider to have adopted a similar path as yours and have eventually succeeded or actualized their lives.
Works Cited
Collins, Alex. Introduction to Finance: How to Plan for Your Finances. New York: Routledge, 2008. Print.
Shelley, Lee. Financial Management: Financial Planning Process. New Haven: Yale University Press, 2002. Print.
Wood, Stacy. Financial Planning and Budgeting. Boston: McGraw-Hill, 2007. Print.