Personal Financial Planning in a Nutshell

You may already have a personal financial plan or you may be thinking it's time to look at personal financial planning, but you may also be wondering what to include and why you should have one?

Here are the answers to those questions - Personal Financial Planning in a Nutshell.

A financial plan is a combination of a stock-take of your personal finance and money situation, a set of goals along with investment recommendations. Like Dorothy in The Wizard of Oz, it's a path for you to follow - there are often alternative routes and which route you take will determine your destiny.

If you want to retire from work one day and have sufficient financial resources to enjoy it, then making a personal financial plan is a great step to take.

Here, are some reasons for doing it and a guide to what's included in a good financial plan.

A good personal financial plan has a number of sections and depending upon the complexity (or not) of your financial position and your stage of life will determine how much detail is included in each section.

Your financial plan should cover the following;

1. Your current situation - a list all of your assets and liabilities
2. Your budget -

• Your income - personal income and investment income in different sections
• Your taxation
• Your expenses - in sections such as - essential fixed expenses ( like your rent or mortgage payments, variable expenses (required expenditure such as rates, medical insurance etc) and discretionary expenses (the fun part of spending)

The surplus (or shortfall) is then calculated as funds available for saving and for meeting those all important personal goals.

3. Your goals along with a time frame. Its easier if you chunk your goals into those which are short-term, medium term and long term.

Examples of short term goals are going on holiday to Hawaii next March and it will cost $3,000. Notice how specific that goal is?

Medium term goals might be replacing the car in two years time at a cost of $10,000.

The classic long term goal is to retire on my 63rd birthday and have an after tax income of $X per annum.

Why should you chunk your goals? It's easier to see them and easier to achieve them. Short-term goals are usually reasonably easy to achieve but long term goals much more difficult. By chunking them, you can more easily check them off as you reach them.

4. Your risk profile - an assessment of your attitude to risk via a risk assessment is vital to understanding how you tolerate risk - or the ups and downs of the market.

The information from your risk profile will be used later when your financial planner recommends the percentage of investments to be made into the various asset classes of cash, fixed interest, property and equities (shares).

This is the exciting part of the plan.

In this section your financial planner (or you if you are doing a DIY financial plan) wraps numbers around your goals.

It's the details of how you can (or sometimes cannot) achieve them.

Part of this section will include a savings program for short and medium term goals which will usually be held in cash or fixed interest as these are liquid assets.

Also included will be a recommendation for long term savings for retirement. The plan will differ on whether the details of those investments are included here or in the investment section of your financial plan.

The insurance section of the plan takes a look at your current insurance and also insurance which is recommended to protect you and your family.

Are you covered for income protection so that if you are seriously ill or disabled, your income will continue (at some level) while you are unable to work?

What level is your medical insurance, life insurance, insurance to cover the debt etc?

You could be forgiven for thinking that this should be the real focus of a good personal financial plan. In a way it is, but its really just a tool.

What's critical are your goals and the investment side of it is just the way you can achieve those goals.

The investments which are recommended will be shown by asset class - cash, fixed interest, property (not your personal home but investment property) and equities or shares.

Mutuals and managed funds are often a combination of the above asset classes and so they might be lumped together.

Cash and fixed interest are liquid assets because if you need to you can easily turn them into cash. Property and equities are illiquid assets because its more difficult and often takes time to realise cash from these investments.

Regular monitoring of your plan is essential to see if you are on track, if the investments are still considered appropriate, your insurance coverage is adequate.

Generally, but this is age dependent, your plan should be reviewed at least annually and adjustments made.  However, if there are major life changes - a marriage, divorce, children arrive, inheritance is received, significant job changes which affect income to name a few, then your plan should be reviewed with haste.

So that's it!  Personal financial planning in a nutshell.

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