Personal Finance Planning Process and Tips
The main goal of personal financial planning is to chart a pathway to financial independence and grow wealth. In most Malaysian households, the role of financial planning is relegated to the breadwinner, with little to no open discussion about personal finance or how income is being developed within the family. As money-savvy Malaysians, we should learn about the ins and outs of money to truly understand our options.
Youths often ask, “what is financial planning?”. The term is alien for many, with most adults not keeping to a strict budget themselves. The benefits of financial planning are extensive, with increasing long-term flexibility in finances and living opportunities. Through a combination of budgeting, investment and long-term financial goals, everyone can be on the pathway to financial freedom.
Chartering your wealth includes both personal and family financial planning. One of the many benefits of personal financial planning is consistency. Establishing a low-risk retirement stake, purchasing bonds and investing in index funds allows for a diversified portfolio. Through low-risk investment and careful financial planning, long-term goals such as debt-free retirement, house ownership, education funds and even inheritance for future generations is possible.
The advantage of personal financial planning begins from the very start of your career. As early as your first paycheck, acknowledging necessary costs versus wants is important. Setting small, realistic savings goals is a great beginner step to eventually snowball towards wider investments. Emergency funds are always useful, especially with tumultuous labour markets and incoming recessions. By planning ahead, personal and family financial planning can be ensured. Though putting all your money into high risk, get-rich-quick schemes is tempting, the slow and methodical means of low-risk investment has proven to be the best way for individuals and families to grow their wealth.
Personal financial planning process steps begins with categorising spending. Simply listing down purchases, bills, rental payments, education loans and taxes informs the average consumer about where all their money goes. With consistent practice, logging everyday purchases has been shown to improve buyer consistency by holding people accountable to themselves. The act of recording spending disincentivises reckless purchasing whilst also making hobbies and gifts all the more rewarding.
The second personal financial planning process step is to establish a personal 5-year financial plan. While the exact contents and methods of each plan differs from one investor to the other, sketching out what medium-term money goals are important to your life is important. Whether the solution to achieve these goals comes from reducing spending or increasing income, goals such as paying off debt, investment milestones or starting a business are important motivators for personal financial planning.
Though it may seem daunting at first, there is no hard or fast rule for a personal financial plan. Below are some important points:
Through careful organisation of all your assets and liabilities, your financial net worth becomes much clearer. By subtracting your total liabilities from total assets, investors can easily perceive the starting point for personal financial planning. If the total net worth is positive, the freedom to invest surplus assets into long-projection growth becomes an option. If investors retain a negative net worth, realistic planning on how to get out of debt may begin. Though it may be hard to admit, honesty in finance is the best personal financial planning advice you gift your future self.
An important part of personal financial planning is factoring in opportunity cost. With the limited income available to the average worker, the breadth of goals is important to consider. While some may place ‘furthering their education’ as a long-term goal, others may include ‘travel’ or ‘debt removal’. Tackling goals individually tends to be more effective than saving for multiple goals at once. Certain investments such as education may create dividends in the form of career opportunities as well as broadening an individual’s potential labour market.
As your financial planning journey continues even into retirement, the knowledge and awareness needed for personal financial planning is important. Safeguarding your investments with the help of investors is one of the ways you can grow your wealth. Taking charge of your financial planning reduces the emotional burden of mislaid finances as well as the personal troubles of debt. Being aware of your financial equity and pursuing a lifestyle within your means will pave the pathway to success.
Assuming yearly earnings of RM36,000 (monthly RM3,000)
5 Year Financial Plan (Debt Repayment & Emergency Fund Growth)
RM10,000 loan, 36 months repayment, 15% p.a. interest