Creating Your Own Financial Plan

By Alvin T. Tabañag, RFP®

Filipinos have a common misconception about financial planning being only for the rich. Many also see it as boring, confusing, and tedious. Financial planning is not just for the wealthy. It is for every responsible Filipino who cares about the financial future and security of their family. Creating your own financial plan can be an enjoyable and exciting endeavor if you know how to do it. Here are the steps in creating a comprehensive and effective financial plan.

1. Set smart financial goals.

   You will not know what to do or where to go if you do not have goals. The first step in creating a financial plan is to set “smart” goals. A financial goal should be specific (clear and detailed), measurable (includes an amount), achievable (doable with sufficient effort), realistic (not impossible), and time-bound (should have a deadline). Write down your goals, prioritize, and classify into short, medium and long-term goals. Split big goals into a series of smaller sub-goals to make it easier to accomplish. Visualize your goals often to keep you inspired and improve your chances for success.

2. Assess your financial condition.

   Knowing your present financial condition will allow you to develop a better plan of action to hit your financial targets. It will also help you determine if the goals you have set are achievable and realistic. There are three things you need to determine to know where you stand financially: the things that you own which are of value (assets), the things that you owe (liabilities), and your net worth, which is the difference between your assets and liabilities and also called the true measure of wealth. Update your list of assets, liabilities and net worth once or twice a year so you can monitor your progress.

3. Create a budget & savings plan.

   A budget or spending plan will help you control and manage your expenses. It is also a vital tool for achieving your goals. The first item in your budget should be the amount of your monthly savings. Ideally, this is 10-20% of your income. If this is too much, start with a smaller amount and just increase gradually. Your spending plan will also include a budget for debt payment, housing expenses, food & groceries, utilities, school-related expenses, transportation, clothes, vacation & recreation, and charity, among others. Get inputs from other members of the household so you can come up with a realistic spending plan that they will follow.

4. Manage your debt.

   Paying off debts should be one of your top priorities because huge amounts of debt can keep you from accomplishing your financial goals. Make a list of all your debts, including how much you need to pay monthly and the due dates. Prioritize paying the debt with the highest interest rate and just pay the minimum for the rest. Debt management also includes taking steps on how to keep your debt in check. These may include changing your lifestyle, strictly following your budget and carefully evaluating any planned purchase. You will not be able to get out of a debt hole if you continue adding to it.

5. Get ample insurance protection.

   Death is a certainty in life. A life insurance policy is absolutely necessary if people depend on you financially. The proceeds of your life insurance will address many of your family’s needs after you go six feet under. It will help them continue to live comfortably even when you are no longer around. Talk to an insurance agent to know how much protection you need but buy only what you can afford for now. You can always add to it later. You also need to get health insurance to cover medical expenses in case you or any member of the family becomes ill or injured. If you own a home you should also have it insured.

6. Plan for your children’s education.

   Every year hundreds of colleges and universities increase their tuition fees an average of 10%. If you have children, it’s a must that you prepare for their education well in advance. You just can’t depend on your salary because there’s no guarantee that you will still be earning well when they enter college. The earlier you start saving for your children’s education, the easier it will be on your pocket. Consider buying an educational plan for your children from pre-need companies or life insurance firms. You may also opt to save money specifically for their education and invest on your own.

7. Plan for your retirement.

   You will likely spend a significant portion of your life in retirement. Whether it will be a comfortable or a miserable retirement will depend heavily on how you prepare for it. Government statistics show that 75% of senior citizens are poor and another 15% are just meeting basic needs. Only 1 in 10 seniors is living comfortably because a vast majority failed to plan adequately. You simply can’t rely on your government pension because it’s not enough. It’s also unfair to obligate your children to give you old age support. Retirement planning, which should be started as early as possible, will include deciding on a retirement age, determining your future needs and saving/investing to accumulate required funds, among others.

8. Create an investment plan.

   Keeping your money at home or in low-interest savings accounts will lead to a steady decrease in your purchasing power because you will not be able to keep up with the effects of inflation – a “savings killer.” It will also take you longer to achieve your goals. If you are saving P3,000 monthly and you put it in a savings account that only earns 1% per year, it will take you 25 years to accumulate P1 million. Place it in an investment that earns 6% a year and it will only take you 17 years. Consider investing regularly in long-term time deposit accounts, mutual funds and unit investment trust funds (UITFs), government securities, investment-linked life insurance, stocks, real estate or in a business venture.

9. Plan for the transfer of your wealth.

   It is essential for the proper and orderly disposal of your assets. Your children could turn against each other or turn hostile towards your spouse if you don’t have an estate plan. In simple terms estate planning involves how you want your estate, which includes all real estate properties, cars, jewelry, cash, investments and other assets that you own, to be distributed after you die. Basically, it identifies, through a will, who gets what. Estate planning is a somewhat complex process and requires considerable legal documentation. It is best that you consult with an estate lawyer.

   A complete financial plan will cover all of the areas above. However, not all areas may apply to you at the moment so work only on those that are currently relevant to you. If all these seem too complex and daunting you can always engage the services of a financial planner. A financial planner can help you craft a realistic financial plan that covers all important areas of your finances.