Saturday, May 12, 2007

Begin with an End in Mind

Are you living on a paycheck to paycheck every month? Ever wonder what will happen if the next paycheck doesn't arrive the next month? Well, I leave that to your imagination. I think you know it better yourself the kind of situation you will be putting yourself in.

All of us are busy everyday working hard to earn a living. The question is: Do you want to do that every single day of your life? Seriously, do you want to? Even if you don't mind, do you think you can work till the last day of your life? I guess that would not be possible either.

For many, even if you are not living on a paycheck to paycheck, I am sure, if given a choice, you do not want to just earn a living, you want to live a LIFE. And I am telling you that this is possible if you set your mind to it.

Whether it is for retirement or to improve our life, I think it is important that we seriously look into our personal finances. Today, I would like to talk about Financial Plan.

To be successful, a corporation has a business plan. Similarly, a person ought to have a financial plan in order to be successful in life, isn't it? With a plan, your direction is clearly set out and the actions you need is clearly spelt out.

How do I develop my financial plan? Just follow these simple steps:
  1. Determine the amt you need annually to enable you to live the lifestyle you desire without having to work. Please be realistic with yourself when you do this. Otherwise you will fall off the chair later when you see the derived financial goals.
  2. Divide (1) above by the rate of return. The rate of return shall be the return you expect to earn from any investment. Usually a very conservative rate is used as you would not want to put the funds in high risk investment.
  3. The resulting amt shall be your financial goal.
  4. Next, tabulate out how much assets you have right now. By assets, I mean bank deposits, CPF money, Life insurance/Annuity, unit trust investment, stock investment, investment property, etc. i.e. cash or in kind that generates cashflow for you. At the same time, assign an assumed ROI (return on investment) for each class of assets tabulated. Thereafter, work out the weighted ROI for these total asset currently held by you.
  5. Prepare your income and expenditure statement to determine your annual saving. In the same manner as mentioned in 4) above, tabulate out to which assets the annual saving is channeled and then work out the weighted ROI.
  6. With the given weighted ROI from 4) and 5) above and assuming that your annual saving continues to accumulate and your total assets continues to grow at the given ROI, determine how much your wealth would have grown by the time you retire. Use the future value formula in excel file to get this number.
  7. Compare the total wealth that would be accumulated in 6) above to the financial goals derived in 3) above. Do you have a financial gap?
  8. If there is no gap, good for you. It just means that you do not have to do anything differently from now and if things go smoothly, you will reach your goals by the time you stop work. If there is a gap, you have to review your investment portfolio and/or the amount of the annual saving. This can be done by first determining the ROI you need to have to close the gap. Using the future value formula, make a few reiteration by changing the ROI until the gap is closed. You may have to adjust your annual saving too to finally come to a comfortable ROI and annual saving that will help you achieve your financial goals. (Caution: for some, you may have to also look at multiple source of income to boost your wealth creation)
  9. Once the desired ROI and annual saving are defined, you are ready to take action.

Isn't that simple? Don't you find that you have a clearer picture in your mind now where you need to go and what actions you need to take?

If you think you need more help in this area, feel free to get hold of a copy of the free financial plan template that is available to you at the top right hand corner of the blog.

Wishing your success!

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