Basic Financial Planning
We have highlighted the key factors of basic financial planning on our importance of financial planning page. With these in mind we'll break things down into a step-by-step process and work towards a complete financial plan. The benefits of having a financial planWhen I was starting out in my first job in my twenties, I didn't realize exactly what I was doing financially. I only knew that I didn't like my spending pattern, learnt that it is better to put something aside for wealth creation and accidentally followed a strategy that then developed into a basic financial planning program. I started my career as an IT consultant and at that point in time didn't know much about the finance industry. Unfortunately in those times, financial planners were very scarce and not established as a profession. If I had known about basic financial planning then I could have started much earlier and would have focused on achieving my financial goals better and sooner. A basic financial plan gives you several very important benefits:
In summary, a basic financial plan is a program to make you work and improve on your financial wellbeing. Financial planning is very individual and everyone's program will look different. Today, as a financial planner, I draw on key principles and my own experience that I've made over many years when putting together a financial plan in the pursuit of good wealth. One of the best pieces of advice I got in my life was to draw up a basic financial plan and get the assistance from professionals as much as I could until I fully understood what my opportunities were and how to go about them. In the following, we will look at the main steps in a personal financial planning process. The pursuit of good wealthA basic financial plan is a great tool to explore financial opportunities and implement solutions that suit you best. Personally, I like continuous savings through cash flow. It's a great thing. It allows me to invest or park money aside and build wealth on an ongoing basis. At first, there will be extra cash in the savings account. Then, my balance starts growing, eventually with growth on growth. This is commonly known as: Compound Interest Albert Einstein once said: "This is one of the best inventions of all time!" referring to compound interest. As trivial as it sounds, this is one of the core concepts of the financial world. Have you ever thought about why banks give you margin loans for making investments? Is it because they think you will be doing great from investing or is it so that they can charge you interest (usually higher than mortgage rates) and make money for themselves? Interest on money is big business and that's exactly how the traditional banking industry still works. We can use the same principle of compound interest to our own advantage. If my money is sitting in my savings account I get paid interest by the bank. This happens periodically, for example, every month. The interest gets added to my balance at the end of each month. Next month, I will earn interest on the combined balance of my previous balance and interest paid. This then continues indefinitely month after month. The next step up is to make investments. Investments can provide you with positive cash inflow into your bank account from dividends, distributions or rent. Once these are banked in the account, again, start to grow from compound interest. Investments also give you the chance to achieve higher returns, for example, from franked dividends paid by Australian blue chip companies or price growth. Compound interest is a global convention that allows cash to grow by regularly set interest rates. Does this happen too with your car, electronic gadgets, clothes, golfing equipment, overseas trip, etc? - Most likely not because these are things that lose value over time or you pay them as a one-off expense. During my first job, I had figured out that my 70-10-20 profile (70% basic needs, 10% luxury needs, 20% wealth creation) had its limits. Overall, I still spent 80% of my money on things that wouldn't give me any return or future benefits. Not only after 10 years, would I end up with an old car, possibly got a few thousand dollars back for a trade-in, but overall, would need lots of money again to buy a new one (or get it financed from the bank and pay them expensive interest). Only 20% of my income was channelled into building wealth that appreciates over time. At first, this was cash in the bank. Later, it was investments such as managed funds, shares, property and more. All of them creating cash flow or passive income. Good wealth is based on assets that increase in value over time. Good wealth is very important. Every personal financial plan must focus on the creation of good wealth that appreciates in value year after year for as long as you own it. Good wealth has three main characteristics:
Good wealth appreciates in value and creates cash flow even if you don't have a job or personal income. In fact, good wealth is so precious, that we should never have to sell it to be able to buy other depreciable assets, i.e. things that lose value over time. Your personal basic financial planning programA financial plan is a program that allows you to achieve your personal financial goals in your life. It is a plan for building and maintaining good wealth that will keep paying you dividends again and again. A basic financal planning program draws on proven financial principles and strategies that help you create enough cash flow so you're able to create good wealth that is growing in value and generates passive income for you. You then simply keep adding to it and keep the snowball rolling. Financial planning is the process of:
If we translate this into a step-by-step process like financial planners use it looks something like this.
Each step is broken down into more details in our free financial advice section. Note that this is a general framework only with which you then research and add your own relevant information. We hope that you'll find our guide helpful when planning for your financial future. Should you find it too overwhelming, of course, you can contact us and we'll help you out. More information:
Importance of Financial Planning
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