6 Key Steps of Personal Financial Planning

Many people would love to handle their hard-earned money to obtain maximum satisfaction. However many do not understand the financial planning process of achieving this goal. Every person or household have a unique financial position, however experts generally agreed that personal financial planning goes through certain steps. The planning process allows you to control your financial situation. As the saying goes if you do not plan to succeed, you are planning to fail. Therefore, our first article on personal finance are the 6 key steps in finance planning.

financial planning

Personal Financial Planning Steps

 1. Determine your Current Financial Situation

If you want to plan for the future, you need to understand your current. The first step is to determine your current financial position. What are incomes, expenses, assets and liabilities? This give an idea of to what extend you need to manage in other to achieve your financial goal. Your financial net worth indicates your capacity to achieve financial goals, such as buying a home, paying for university education, coping with unexpected expenses or lost of job. Your net worth is simply total assets you owned minus liabilities you owed.

Case: Amie currently has a net income of D20,000 per month, living cost of D16,000, one car valued at D110,000, retirement fund balance of D25,000 and savings account balance of D60,000. outstanding on her Car loan is D75,000. Let calculate Amie’s financial position.

Amie Net worth = 110,000+25,000+60,000 – 75000

                              = 120,000

And she currently saving 20% of her net income.

Don’t be sad if your net is very low compared to your goals or the number of years you have worked. This is what you achieve in your past life. You now need to change for a better financial future.

 2. Develop Your Financial Goals

Most people who have built wealth didn’t do it overnight. They set financial goals and push themselves to reach them. You need to identify your specific financial goals. A good financial goal should be SMART i.e. Specific, Measurable, Action-oriented, Realistic and Time-based. Your financial goals can range from acquiring assets, saving for emergency as well as investment for your future financial security. It is important you define your financial priorities based on social and economic conditions. The purpose of this analysis is to differentiate your needs from your wants. Accommodation is a need but buying a brand new car could be considered as a want.

Case: Assuming Amie have two major financial goals in the next 2 years: 1. Study MBA in 2 years’ (D170,000) and buy furniture (D30,000) in the next 1 year.

3. Identify Alternative Courses of Action

A financial goal without a realistic action plan is just a wish. After assessing your current position and set your goals, you need to list out the key actions needed to achieve your goals. There is more than one route to Lagos, therefore Amie could also consider the followings options:

  • Increase the savings amount to 25% or 30% of net income
  • Move the balance in savings to bond or money market investments for higher returns
  • Consider additional sources of income ( be creative, I used to do weekend lecturing)
  • Consider education loan for any shortfall….and many more

4. Evaluate your Alternatives

You need to evaluate the possible courses of actions identified in step 3. The evaluation process should consider your personal life, social and the current economic conditions. In the case of Amie, we can evaluate the options as follows:

  • If you want to save 30% of your salary, it means you need to manage your spending. This can be challenging when cost of living is sky rocketing (inflation).
  • If you want to consider additional sources of income, such as weekend lecturing, it means less time for party and more time to work hard. Your children, partner, parents may need more time from you.
  • You could lose your money if you invest in mutual funds compared to government Treasury bills. Generally, the higher the return, the higher the risk of losing money.
  • Whiles the interest on time deposit and savings may be subject to withholding tax, government Treasury bills are not usually subjected to withholding tax.
  • Consider the liquidity of your assets or investments. Liquidity is the characteristic of an asset that can be converted readily to cash without loss of principal.

5. Create And Implement Your Financial Action Plan

This involves choosing and developing best action plan (from step 3 and 4) that will help you to achieve your goals. For example, you can increase your savings by reducing your spending or by increasing your income through extra time on the job. It is important to note that you may need others to implement your action plans. Example if you to want investment in Treasury bill, you will need a broker..

 6. Review and Revise Your Plan

Like any other planning process, financial planning is a dynamic process and the decision you make are not carved in stone. You need to regularly assess your action plans through periodic financial net worth calculation.

Personal, social, and economic factors may have changed and which possibly require you to adjust your financial goals and/or actions. The review frequency will be also influence by your age and the goal.

Above all, the success of your financial goals will mostly depends on your planning and execution process. You need to set goals and clear means of achieving those goals. Keep proper record of your goals, action points and financial net worth. Whiles moving towards your financial goals, it is important to consider the risk and return of various products and be flexible. Self discipline is the key to any financial success.


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