5 reasons why you need a financial plan and how to create one today

Financial planning is a step-by-step approach to meet one’s life goals. A financial plan acts as a guide as you go through life’s journey. Essentially, it helps you be in control of your income, expenses and investments such that you can manage your money and achieve your goals.

It is an ongoing process of evaluating your financial status, deciding what you want your financial future to look like, and setting clear goals on how to get to where you want to be financially. It requires a thorough evaluation of your current financial status and a clear definition of what your desired financial future is.

A proper financial plan would have details of your cash flow (income and expenses), savings, debt, risk profile, investment, insurance etc. Financial planning can be done by yourself or with the help of a financial advisor but we suggest you start the basic process yourself to get clarity.

5 reasons why you need a financial plan

Uncertainty

The reality of the world we live in requires that anyone looking to secure their financial future needs more than a “good job” and money stacked up in a savings account. With each passing day, the future is becoming more uncertain. In an uncertain world, it is important to have financial buffers that will serve as a defense and keep you on top of life situations. A financial plan helps you achieve that.

Unstable Economies

For investors who live and earn in developing economies like Nigeria, it is crucial to have a financial plan in place. These economies are known for their instability and their currencies consistently lose value due to high inflation and regular devaluation.  A proper financial plan will guide investors in these countries on the mix of assets that will help guard against the effect of inflation and devaluation on their investment portfolios.

Control

A lot of people have clear career goals, people have clear cut plans for their families, but play the ostrich with their finances. We’ve seen and heard of stories where people closed their eyes to their finances, and it came back to haunt them. A financial plan puts you in control of your finances. With a financial plan, you understand where you are financially, where you want to be and how to get there. Following through with a proper financial plan helps you determine the kind of life you want to live.

Wealth and Influence

Wealth and Influence can be achieved with proper financial planning. Wealth is not stumbled into; it requires a certain level of financial knowledge and planning. Even those born into wealthy families need to a certain level of financial knowledge to maintain and grow their family’s wealth. Wealth is measured by value of a person’s assets; assets are acquired by investing. A financial plan helps you build a proper investment portfolio with the right mix of assets. It positions you to take advantage of opportunities that grow wealth.

Retirement

A financial plan helps you achieve your retirement plans. Whether you plan to retire in a beach house on some exotic island or want to spend a better part of your retirement years in active humanitarian service, a financial plan can help you achieve that. A financial plan will list out your retirement goals, how much you need to fund them and how you need to invest to make them a reality.

How to Create a Financial Plan

In the words of Sir Winston Churchill, “Let your advance worrying become advance thinking and planning”. In other words, if you worry about your financial future, then you need to have a plan for your finances.

Here are a few pointers on how to put together a financial plan:

• Understand your Inflows and Outflows: The very first step in putting together a financial plan is knowing exactly where your money is coming from and where it is going to. Your income sources and expenses must be clear cut. Checking to see if your income exceeds your expenses or if your expenses overshoot your income tells you how financially fit you are. A proper analysis of your inflow and outflow will tell you if you need to earn more and how best to utilize excess funds.

• Define the kind of Financial Future you want and Create Goals that will help achieve it: There is nothing like knowing what you want, it informs the decisions you make. To put together a proper financial plan, you need to be sure on what you are looking to achieve, this will inform the kind of goals you’ll set to achieve to it. Our wants and needs evolve as we grow into different stages of life, this is why financial planning is a lifelong thing. A good financial plan will take into cognizance your needs at different stages of life and set goals to help achieve those needs. Creating achievable goals are a crucial part to attaining the financial future you desire.

• Live on a Budget: A budget help create structure around your spending. It puts a cap on how much you can spend at any point in time. A budget might sound rigid, but it doesn’t have to be. To allow for flexibility, you can create a monthly budget, this would allow you push important things that your budget didn’t cover in the prior month into a new month.

• Save to Invest: Declining interestratesand growing inflation has made keeping money in a savings account of no use. Investments help grow money at rates higher than inflation and devaluation for investors in developing economies. Understanding what to invest in however requires some financial knowledge and understanding.

• Know Your Risk Profile: Your risk profile is a definition of the kind of risk you are able and willing to take, and it determines how you invest. It evolves with different stages of life. While a young graduate might be risk averse, he has the ability to invest in high growth investment options, a risk loving elderly investor will not be able to take the same level of risk because of the stage of life they are in.

• Diversify Your Investment Portfolio: Besides reducing your exposure to risk, diversifying your portfolio helps you allocate assets to different asset classes. Assets can be allocated across safety assets and growth assets to create a balanced investment portfolio. Safety assets like treasury bills and money market mutual funds help build emergency funds and gives your portfolio some form of liquidity, while growth assets help grow invested funds.

• Protect Your Financial Well-Being: An important part of having a financial plan is to protect your financial well-being. To protect your financial well-being, you need an emergency fund that caters to unexpected occurrences and insurance policies that protects you and some of your assets from life eventualities.