Most of us have goals. The goals may vary from person to person and could be long-term, short-term or medium-term in nature. These goals could be anything from buying a house, accumulating wealth, starting a business, buying a car, getting out of debt or retiring early. It is important to come up with a plan that will enable you to achieve these goals. A financial plan is a document that shows the strategies that one will use to accomplish (a) financial goal(s).
These are the steps to take in creating a financial plan:
Step One: Know your current status
The first step in getting anywhere is knowing where you are now. Here, one should calculate their current net worth which is the total liabilities subtracted from the total assets. Liabilities are the values of the things you owe others which may include current bills (rent, school fees etc) and debts (loans, HELB etc). Assets are things you own that have value (savings, stocks, bonds, pensions etc).
Step Two: Set the actual goals
The best way to set the financial goals is to consider how you would like your life to be like in the present, near future and distant future. This will enable you to come up with an outline of your short term goals (less than two years), medium-term goals (between two and five years) and long term goals (over five years). The list should be as comprehensive as possible. Ideally, the short term goals should lead to the other longer term goals.
You should consider all goals, even if some do not seem financial in nature. You can use this guideline:
Intellectual Goals which may include furthering your own education, attending seminars or sending your children to good schools.
Occupational Goals involve thinking about your source of income; whether you should continue or advance the career you are in currently or change it all together.
Lifestyle Goals are the things you do for fun or entertainment. These may include going on holiday or travelling to see the world.
Residence Goals involve where one lives. Do you want to rent or buy a home and in what neighbourhood?
Retirement goals are goals where one considers the life they want to live when they retire and make plans towards saving for that lifestyle.
The goals set should be specific (eg be saving Kshs. 100 per day), measurable (if I save Kshs. 100 per day, I should have Kshs. 9,000 in three months), attainable, realistic and time-based.
Once you come up with your goals, you should involve your family or partner/ spouse. This will ensure that you will be able to share your goals and values with your family/ spouse. You may find that they may have goals that may be different from yours or they may prioritise things that you have not. It is important to be on the same page by coming to a compromise and/ or middle ground.
Step Three: Look for ways of attaining the goals
Once the goals are set, the next step is looking at the options you have in attaining the goals. Basically, there are two ways. Either use what you have (use your current assets and income to attain your goals) or seek for alternative sources of income. What is important to note is that your goals may be achieved in a number of options. For example, if your goal is to provide quality education for your children, you may start saving in a bank account or you may take out an education insurance product. List all the options you have.
Moreover, you should also find out how different goals impact each other. For example, one of your goals may be to buy a Kshs. 10,000,000 house while another is to further your education. You may find that advancing your education will help you get a better job which will eventually make you get that house easily.
Step Four: Choose the strategies to use to attain the goals
After listing the options you have, you should now gauge each and every one of them, gathering as much research as you can on the options. This will enable you to pick out the best options that are tailor made for your situation. Different people will pick different options because they are not in similar situations (even if they earn the same amount of money). For example, two people may have investing as an option. However, one may be knowledgeable while the other may not. In this case, the one who knows much about investing will easily go for the option, while the other may have to ponder on whether there is an alternative better option or whether they can get investment advice from elsewhere. Here are some investment tips you should consider.
Step Five: Implement the financial goals
Once the goals are defined and the strategies to meet the goals are set, then implementation begins. You should look at your situation and current net worth and find out which goals are most realistic. Decide on which goals you will pursue now. Implementing some strategies will take more time than others. Create a budget that will take into account the financial goals and the strategies you have put in place. Always ensure that you stick to the budget.
Step Six: Evaluate your financial plan
Your financial plan is a working document and hence needs to be evaluated regularly. Similarly, life changes and what works now may not work in three years. New investment opportunities are coming up every so often. Therefore, there is nothing wrong in changing or amending your plan. You may review and evaluate your plan annually or semi-annually. If there are elements that are not working, remove them. If there are elements that may work that you had not included, include them. The main purpose is to get to the goals.
Other than this, read widely on financial matters, talk to professionals and enhance your financial know-how. The more you know about financial matters, the better your plan will be. Always remember to account for inflation (about 10% per annum) in your projected expenses.