In order to create a personal financial plan, we recommend you set short-term, medium-term and long-term financial goals.
Short-term goals can be accomplished in five years or less - for example, saving for an overseas holiday. Medium-term goals can be achieved over five to 10 years - for example, buying a car. Long-term goals take longer than 10 years to achieve - for example, paying off a home loan.
Do not make the mistake of putting all financial goals into the category of investments; plan for non-investment-related goals, such as becoming debt-free.
The next step is to ascertain where your money is going. One way of doing this is to set up a budget, which will enable you to gain a clear picture of how much money you earn, how you spend it, and how much is left over, if any.
Reducing your expenditure is another step in tracking your money, because an aspect of a budgeting exercise is to face up the harsh reality of the dent debt makes in your cash flow.
A key aspect of a personal finance plan is getting rid of debt, which can be done by making a list of all debts and cutting out non-essential expenses so that you pay off a loan much faster.
You also need to be prepared for life’s “curveballs” - or to manage the risks to your financial security. These risks tend to change during the course of your life. Risks can be managed by identifying the cause of risk, such as untimely death or permanent disability. You need to determine how much of a risk you are prepared to accept and how much you need to pass on to a financial institution. The real risk could lie with your dependants, and this is where life insurance is crucial.
It goes without saying that saving should be part of your personal finance plan. An easy way to do this is by investing your surplus funds to reach your financial goals and dreams.
Each stage of life presents new financial challenges, which your personal finance plan needs to accommodate. For example, if you are retrenched, you will immediately lose the revenue stream that represents the cash inflow in your budget. You need to ask yourself whether you have sufficient emergency funds to keep you going for a while.
If you can confidently answer “yes”, you are well-prepared with a solid personal plan. But if not, then you need to make some adjustments to your plan.
Managing your own finance may require a bit of help from time to time, and if you are struggling to come up with an adequate personal financial plan, there is no harm in seeking out a financial adviser or broker.
Your financial plan is the backbone of every financial decision and dream you may have - now and in the future. Your financial goals will vary regularly, so remember that life does not start at retirement and it is never too late to start saving.
Barend van der Westhuizen is the provincial general manager at Absa Insurance and Financial Managers.