Personal Financial Planning | 6 Practical Steps to Re-Organizing Your Finances and Creating a Financial Plan

personal financial planning

Going about personal financial planning can be a daunting task but here i will share with you six (6) practical steps to follow to get started. Did you hear what i said?...I will share six PRACTICAL steps. So, what i expect is, after you are through learning the steps, you will get down to work and start setting the financial planning process into motion. Right?!

Financial planning is the process of meeting your life goals through the proper management of your finances. - Certified Financial Planner Board of Standards (US)

Step 1: Determining your current financial position

You could be in a tough financial situation right now but the first step you need to take to deal with that situation is to find out where you stand financially. Get a true picture of your current financial situation (before you strike the panic button) so that you can make informed decisions thereafter. You need to determine your current financial position with regard to income, savings, living expenses, and debts. To do that you will need to prepare your personal financial statements. It involves preparing a list of current assets and debt balances and amount spent for various items. This gives you the foundation for the rest of the steps in the personal financial planning process.

Financial tools for evaluating your current financial position

Step 2: Setting financial goals

Now you know your current financial position. Are you happy with it or there are some things that need to be fixed? This is the step where you map out what you want to achieve. It could be you want to acccelerate the loan repayment or start saving for a down-payment for a home purchase or start setting up a reserve (emergency) fund or save for your next vacation or realign your investment portfolio so that you it produces your desired investment return etc. All these need to be formulated as goals.

Setting financial goals is about formulating the kind of lifestyle you want. A lifestyle that you will be able to maintain financially. It will involve identifying your needs and wants and setting priorities. This allows you to analyze your financial values.

Financial goals can range from spending all your current income to developing a comprehensive savings and investment plan for your financial success.

Long-range planning does not deal with future decisions, but with the future of present decisions. - Peter F. Drucker

Achieve what matters most by setting SMART goals

Step 3: Identifying alternative courses of action

After setting up your financial goals, you will need to make changes and adjustments in the way you have been spending your money. Decisions will be required to be made and this will involve identifying alternatives. Identifying alternatives is crucial for the acheivement of your goals.

Definition of insanity is to do the same things the same way and expect different results - Anonymous

True, you won't get different results if you keep on doing things the same way you have been doing before. You have to look for alternative ways of doing things. Although many factors play to influence the available alternatives, you will face these possible courses of actions:

  1. Continue the same course of action: For example, if you found that the amount you are contributing towards building an reserve fund each month is still enough, then you can continue saving the same amount.
  2. Expand the current situation: For example, if found that you have not been setting aside the recommended 10% of your income towards savings, you may consider contributing a larger amount each month to your savings.
  3. Change the current situation: For example, if your house rent is too high and you would want to cut it down, you may consider moving to a cheaper rental house in another neighbourhood.
  4. Take a new course of action: For example, if you found that your energy costs are too high, you can decide to install solar water heaters and energy saving lights to reduce energy consumption.

Whereas not all of these categories will apply to every situation, they do represent possible courses of action. Creativity is vital to making effective choices. Therefore, consider all of the possible alternatives to make effective and satisfying decisions.

While evaluating possible courses of action, it is important to take into consideration your life circumstances, personal values, and current financial situation.

Making Financial Decisions | Identifyimg Alternative Courses of Action

Step 4: Evaluating alternatives

Once you have identified alternative courses of action, it is important to evaluate them. Every decision made closes off other alternatives and will have an opportunity cost to it. This cost, commonly referred to as the trade-off of a decision, cannot always be measured in monetary terms. It may refer to the money you forgo by refusing a promotion that would take you away from your family, and may also refer to the time spent doing comparison shopping for a major purchase. In either case, the resources you give up (money, time, health, or energy) have a value that is lost.

Let's look at our three examples above:

  1. Deciding to increase your savings contribution to, say 20% may require cutting down on other expenditures if your income remains constant. This may result to reduction or limit on some luxuries.
  2. Moving to a cheaper rental house in another neighbourhood to cut down on your rent, may result to loss of wonderful neighbours or things you were used to.
  3. Installing solar water heaters and energy saving lights can be quite expensive in the beginning but cost effective in the long run. So, going with this option may mean temporarily haulting other planned big spending like going for a vacation or buying a new car.

Making Financial Decisions | Evaluating Alternative Courses of Action

Remember, decision making will be an ongoing part of your personal financial planning. You therefore need to consider the lost opportunities that result from your decisions which vary from one individual to another depending on one’s life circumstances and values.

Step 5: Creating and Implementing a financial action plan

It's action time! By now you know where you stand financially, your financial goals are set, you've identified and evaluated your alternatives. You now need to put everything into an action plan. The action plan you develop must be result oriented to achieve your goals.

A dream becomes a goal when action is taken toward its achievement. A goal without a plan is just a wish!

To implement a successful financial action plan, you may need to consult competent financial experts. For instance, you may enroll the services of an insurance agent to purchase property insurance or the services of an investment broker to purchase stocks, bonds, or unit trusts.

How to develop a financial action plan to achieve your financial goals

Step 6: Reevaluate and revise your plan

Financial goals are not cast on stone. You need to regularly assess your financial decisions and review your finances at least once a year. When life’s demands affect your financial needs, personal financial planning process provides a way for adapting to those changes. Regular review of the financial planning process provides space to make important changes that align to your goals and activities.

Finally, developing a financial plan takes rationality and creativity. You have to be rational enough to assess your current financial situation, creative enough to see what is possible, and have the integrity to follow through with the plan. Just because it’s on paper doesn’t mean it will happen. You have to decide to follow through and live up to your goals. This is the hardest part, and the one that trips most up.

Financial planning is crucial. It’s vitally important because, in many cases, not even the men and women behind the most profitable companies in the world are successful money managers. Managing your money well means Mastering Money - Gerry Robert, Millionaire Mindset Author

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