We all have goals and aspirations, whether to buy that dream home, save up for a comfortable retirement or to leave a handsome lump sum for our loved ones. This is where financial planning can play a crucial role.
Most of us also know that relying solely on our CPF savings for our future needs may not be wise. Many pitfalls may lie in wait for us, such as the rising cost of living or unexpected economic downturns. Any of these events can have major effects on our personal finances.
However, by planning our finances, we can remove as much uncertainty as possible. Our immediate priority should be to live comfortably within our means through ensuring that our lifestyles are appropriate for our incomes. This means our expenses should never exceed what we earn. And with these savings, we can start to take the first steps towards growing our wealth as well as insuring ourselves against unforseen events.
It is important to understand that financial planning is not just for the rich, but is really for everyone who thinks seriously about their future needs. To help you understand how financial planning works, we can break it down into a 4-step process as follows:
First, define your goals, be it a comfortable retirement or ensuring sufficient funds to put your children through university. While these may be our long-term goals, we may also have other aspirations, to upgrade our homes or take off on that dream holiday. Whatever the case, a financial plan will help you to achieve these targets by setting out a proper framework and roadmap to guide you.
Now that we have identified our goals, the next step is to formulate a plan to achieve these aims. It is also important to understand that a plan always involves one very important element - time; or in other words, the need to plan early. Time is one of the most powerful elements of a financial plan. By planning early, you can minimise the chances of not accumulating enough funds to meet your long-term goals.
oth steps 1 and 2 seem simple, but the tricky part usually comes when putting things into practice. This is the third and crucial step needed for the plan to work effectively. And this step is usually best achieved with the help of a qualified financial adviser who can draw up a plan for you as well as put it into action. For a quick guide on dealing with a financial adviser, please read the MoneySENSE guide "Dealing With A Financial Adviser: What To Look Out For?". This guide contains useful tips on dealing with a financial adviser and how to protect your interests.
The final step is to review your financial plan on a regular basis. You may have a new addition to the family, or earned a recent promotion at work. Such events can be wonderfully life-transforming with major implications for your finances. Sitting down with your financial adviser to ascertain if your plan is still valid for the future would be very useful.
Now that you understand the 4 steps of financial planning, embarking on the journey towards financial freedom and a secure retirement can become much more rewarding and fulfilling.