Five steps to personal financial planning

April 21, 2015


There are a number of important aspects of a person’s life among them being: family, health, religion, and finances. For one to enjoy a fulfilling life, every aspect requires proper planning; whether it is planning for a holiday, medical check-ups or even retirement.

Personal financial planning could be the most important of all because it has a significant impact on the other areas. Financial planning refers to the careful and in-depth evaluation of a person’s current and future financial goals and needs and ways of achieving them through investing, budgeting and saving. Like an investor, individuals should view these aspects of their lives as investment opportunities with the potential to grow their portfolio.

Investors must plan for both the short term and the long term. Short-term planning rarely looks further ahead than the next 12 months. However, the area of focus should be long-term planning, where a typical horizon is 5 years.

Here are the five steps to Personal Financial Planning:

1. Determining the current financial situation

There needs to be a clear understanding of the level of income, expenses and savings. This allows the investor to build a budget, which can be used towards investments. The aim of financial planning is to have the highest net worth possible. If you take a loan to buy an investment, the rule of thumb should be that the returns on the investments should be higher than the interest rates on the loan.

2. Developing your financial goals

Each investor should set goals that speak to their financial situation. The financial goals should be SMART i.e. Specific, Measurable, Attainable, Realistic, and Time-based, and hence need to be unique and customized to fit each individual’s needs.

3. Evaluating the alternatives and courses of action

Once the goals have been identified, the investor should carefully select the ones that best fit his/her preferences in terms of risk, return and liquidity. These can range from equities, money market or alternatives in real estate and private equity.

 4. Creation and implementation of the financial action plan

Once the viable opportunities have been selected, the investor should decide the exposure to each asset. To recap, the key factors that should be in consideration when making the financial plan are:

a) Age: the younger one is, the more risk they can take

b) Income level: the higher the level of Income, the more risk they can take;

c) Level of Sophistication: the more sophisticated an investor is, the more risk they can take.

5. Reviewing and revising the action plan: After investing, it is important to review the financial action plan and make the necessary changes in order to align it with the investor’s needs as they evolve. After a set period, or after a certain change in life circumstance, e.g. the birth of a child or getting married, the plan should be able to be revised to reflect the new financial situation and the five steps start again.

If an investor diligently executes the five steps in the financial planning process, they will achieve better management of their financial resources, improve their standard of living and grow their wealth. Because an investor will be consciously thinking about their goals, they are better positioned to take advantage of lucrative investment opportunities as they may arise from time to time.

By Shiv Annop Arora

Investment Associate

Latest Articles

Business Podcasts

Live prices

Stock Market

Most Viewed