FOR?SOME?OF?US who are clueless when it comes to formulating any kind of plan, especially when it relates to money management, financial planning provides the framework for doing just that.
According to Stevick (2010), financial success begins with establishing a solid foundation of economic security and the ability to meet emergencies.
It is said that there are four sequential stages to financial planning where wealth foundation is the first stage, followed by wealth accumulation, then wealth preservation and wealth distribution.
The first stage, wealth foundation, is what most people tend to focus on first, as it is the stage where one can protect oneself against life’s unexpected occurrences and possible catastrophic financial loss. Any financial plan must begin on a firm foundation where budgeting, debt reduction and setting up an emergency fund are vital.
Additionally, by incorporating investment planning, estate planning and insurance plans, financial planning allows your finances to stay healthy and organized. Once this level is stable, the risk of financial loss is minimized.
It is important to note that before any financial plan can be implemented, an individual must set clear and realistic financial goals which should address five basic objectives:
Protect against risk
Provide for financial security
Develop a comfortable lifestyle
Provide for a comfortable retirement
Plan for the distribution of assets
Life insurance helps to protect against these risks and can help satisfy many goals and needs which may include:
Survivor income needs – this is where the death of a spouse or family member terminates an income stream and creates the need for supplemental income;
Cash needs;
Final expenses – costs related to dying;
Emergency fund – there is a general rule that one should set aside at least three to six months’ income to take care of unforeseen circumstances, such as job loss or illness;
Education fund – provides for the continued educational needs of surviving children or spouse;
Supplemental retirement funding – where additional funds are provided for the surviving spouse;
Charitable donations – provide funds to the favourite charity or organization of the deceased; and
Supplemental cash for future needs.
You should also therefore consider incorporating life insurance, medical insurance, disability income insurance, long-term Care insurance and property and liability insurance in financial planning.
Leaving a will is also prudent in order to ensure that certain conditions and wishes are met according to instructions of the deceased. It is always wise to seek legal advice with regards to the setting up of this important document.
You should never put off setting up a will, as waiting too long has been proven to be costly, very time-consuming and emotionally draining to the family of the deceased.
It is also advisable to enlist the services of a competent financial advisor or trained professional who can help to provide the knowledge, expertise and guidance required to implement a financial plan. Discipline is also key to achieving your financial goals and dreams.
Furthermore, a strategy should be implemented to ensure that you are getting the most out of your income.
If being disciplined is not your strength, you may consider opting to set up a direct-debit agreement to make payments into a savings account, debt repayment, retirement savings plan and insurance payments. Remember to always keep the emergency fund separate from a regular savings account.
Building up an emergency fund should also be treated as a financial goal. Once these tips are followed, you will be well on your way to financial success!
Diana Moulton is an interim member of the Barbados Association of Financial Advisors.