How to Create Your Own Financial Plan

Personal Financial Planning is the process of evaluating and improvement of one’s financial situation, through the studying of economic factors and individual choices.

It is essential to know how to save, spend, invest, and control your finances, in order to achieve financial and life goals. The reward of sound money management is an improvement in one’s standard of living and lifestyle. This is true whether you are a 20-year-old university student, a 40-year-old parent with a mortgage, or a 60-year-old thinking about retirement.

An important outcome in the planning process is the development of a personal financial plan that guides a person’s overall financial decisions. For instance, investment plans would involve asset allocation that determines the percentage of an investment portfolio to be allocated to equities, bonds, or other types of investments.

In theory, you can create your own financial plan. However, in reality, many people do not follow consistent plans in making their financial decisions. This is why many people prefer to engage professional financial planners to help them develop and implement sound financial plans, as well as monitor and review them periodically.

The financial planning process can be classified into 5 steps:

1. Gathering your data
2. Analyzing and evaluating your financial status
3. Developing your financial plan
4. Implementing the financial plan
5. Monitoring and review

1. Gathering your financial information

Before creating a financial plan, you must first define your own personal and financial goals, needs and priorities. It is important to determine specific and measurable objectives to provide focus and direction for the financial planning process. In order to do so, you must gather both quantitative and qualitative data. You can see some examples below.

Quantitative Data

• Personal and family profile such as name, gender, date of birth, age, smoking status, marital status, job, information of spouse and dependents, etc.
• Assets and liabilities including CPF
• Cash inflows and outflows
• Insurance policy information
• Employee benefits
• Current investments
• Business information (if you are a business owner)
• Copies of wills and trusts

Qualitative Data

• Goal and objectives
• State of Health
• Career expectations
• Interest and hobbies
• Anticipated changes in lifestyle
• Investment experience and preferences
• Risk-tolerance
• Money values
• Family relationships
• Current and projected economic conditions
• Other planning assumptions

In the planning process, certain reasonable personal and economic assumptions need to be considered. These assumptions may include:

• Personal assumptions
  • Retirement age
  • Life expectancy
  • Income needs
  • Risk factors
  • Time horizon
  • Special needs
• Economic assumptions
  • Inflation rate
  • Investment returns
  • Tax rates

2. Analyzing and evaluating your financial status

After gathering all the information available, you need to assess your financial situation and determine the probability of reaching the stated objectives by continuing your present activities. To help the analysis, you can engage a financial planner to prepare a statement of financial position, a current cash flow statement, and if appropriate, a projection of future cash flows. Or if you decide to do it yourself, you may find a free online retirement planning calculator, or investment goal calculator to help you derive your numbers.

Careful analysis and evaluation are critical to the financial planning process, because they form the foundation for determining the strengths and weaknesses of the your financial situation and current course of action. As everyone has limited resources, it is important to prioritize certain needs over others.

Common problems faced when assessing financial needs and objectives:

• Sacrificing long-term needs to meet short-terms needs. This is partially because instruments like insurance or certain investment products, are often used to meet long-term objectives. The rewards for such instruments may take many years to materialize. In contrast, short-term instruments are easy to appreciate, because they can provide returns in a shorter time-frame.
• You may concentrate on achieving certain personal desires (which you may perceive to be essential needs, but it might not be the case) at the expense of other real needs.
• If you have a large estate and/or many beneficiaries, it may be necessary to engage a team of professionals (which may include lawyers, accountants, financial planners, property agents, and investment brokers) to help you in the financial planning process.

What is a Financial Plan?

A financial plan is a document containing a person’s current financial situation and long-term financial goals, including methods to achieve those goals. A financial plan may be created by yourself, or with the help of a professional financial planner.

3. Developing your financial plan

After completing steps 1 and 2, you may discover that you have difficulty achieving some of your stated needs, priorities, and goals. If so, it is recommended that you develop a financial plan to improve the probability of reaching them.

There is no fixed template for a financial plan. It can be an independent action, or a combination of actions which may need to be implemented collectively. Your financial plan may include your retirement strategy, risk management, long-term investment plan, estate plan, and more.

Critical Factors to consider when developing your financial plan, may include:

• Advantages and disadvantages
• Personal and economic assumptions
• Risks and/or time sensitivity

4. Implementing the financial plan

Next you need to look into products or services that reasonably address your needs. They must be suitable to your current financial situation, and consistent with your needs, priorities, and goals.  If you are doing it yourself, you can find them by researching online. The downside is you’ll probably spend a lot of time on product or service comparison.

Alternatively, you can consult a financial planner, who will use his or her professional judgment in selecting the products and services that are your interest. Different practitioners may have different opinions, and it is important that you choose someone who is professional, reliable, and trustworthy.

5. Monitoring and review

Last but not the least, you must monitor and review your financial plan periodically. Modifications may be required, if there are changes the following:

• Changes in personal circumstances
  • Are there any changes in your job/income status?
  • Are there any changes in your health status?
  • Are there any changes in your family? (eg. birth of a child, marriage/divorce)
  • Are there any changes in your assets/liabilities (eg. purchased a new property, car, shares, etc)
• Changes in external environment
  • Are there any changes in the economic and market sphere? Should I consider making a fund switch (for Investment-linked Plans)?
  • Are there any changes in laws, rules and regulations like CPF rules, tax laws?
• Product related matters
  • Is the products you have still relevant to your needs?
  • Is your coverage still sufficient, or do I need to add a rider, or buy a new plan?
  • Are there any new products in the market, that can better cater to your needs?

Unfortunately, most people do not have the discipline to do this consistently, which is why they prefer to engage professional financial planners to help them. A financial planner can help you establish a client file, and a system for periodic review and revision.