Reworking Our Financial Plans

Time is money. Let us start rebuilding to make up for the recent losses.

 

IN the light of recent financial stresses many have faced or have been threatened by, there is a need to revisit our financial plans and align them with our current realities. Our emergency funds may have been drained, new spending priorities could have emerged, and the timelines for achieving financial goals may need to be extended. Like with our initial financial plans, every member of the family must be onboard to ensure that no one inadvertently sabotages the efforts, moreso if additional sacrifices are going to be required of them.

A financial plan enumerates our financial goals, either tied to the financial aspects of life events e.g. weddings, education and retirement or standalone goals of wealth creation. Each goal should have a monetary value and specific timeline attached to it. The plan then describes how these monetary values would be attained within the set timelines; typically, through savings from income, followed by the investment of those savings in assets that generate passive income and build our wealth. With the recent financial stress, those timelines may need to be changed, probably because we are no longer earning as much as before or simply because cannot afford to save as much due to changed priorities. Whatever, the reason, in order to achieve the goals we set out, we should amend the two major factors –amount saved/invested and timelines.

We start by appraising our financial situation and our spending budgets. A realistic budget carefully considers all our spending obligations and puts realistic figures on them. Popular wisdom recommends that before a budget is developed, we spend 1 month (1 salary cycle) reviewing what we are now spending on various items , this enables us to determine how much to reallocate to each category of expenses and which expenses we can successfully reduce or eliminate. Budgets should make allocations to food, housing, utilities, personal care & clothing, transport, dependents’ requirements, entertainment, taxes, insurance, rebuilding of emergency fund and savings (for investment). When we arrive at the amount of funds we have left for investments, we would see clearly how much extra time needs to be allocate to the achievement of various goals.

There may be a temptation to invest in higher yield assets to make up for lost time, but we must remember that the higher the yield, the higher the risk of losing the principal invested. Therefore, we must ensure firstly, that we are comfortable with the new levels of risk. No point having sleepless night because of money. Secondly, we should conduct comprehensive due diligence exercise on each investment – the asset, its managers, the income history etc. before we commit our hard-earned money to it. For the risk averse, it is better to keep their principal and earn a small yield than to lose the principal in the bid to earn hypothetically higher yield. However, we should look beyond the conventional money market and stock market for investments. Closely held equity, peer-to-peer funding, crowd funded projects and real estate should be carefully considered as parts of our new investment portfolios. Having these alternative investments in addition to the traditional ones would ensure that our portfolios generate optimal returns on investment whilst be adequately diversified. Diversification, we remember is a risk management strategy (do not put all your eggs in one basket).

Like we have discussed many times in this column, we can get free yet incredibly good help for our financial planning through the use of personal finance management (PFM) apps. Installed on our cell phones or other compatible devices, they help manage our finances by assisting in the creation of budgets and SMART goals, alerting when bills are due, giving investment advice, monitoring compliance with spending budgets and evaluating our progress towards achieving our financial goals. The budgeting function suggests different expense headings that you may want to budget for, and some apps recommend what percentage of your income should be spent on each expense head. The budgeting function works in tandem with the expense tracker, which as the name suggests tracks every expense made. Every month (or whatever period you choose) the app compares your budget with your expenses (using graphs and charts) and helps you to identify how disciplined you are in sticking to your budget.  The investment management feature provides limited financial advice; using artificial intelligence to analyze data and profile the app user. It helps create investment goals and monitors your progress in achieving the goals. The apps also help with portfolio diversification.

Time is money. Let us start rebuilding to make up for the recent losses. Happy investing.

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