With the recent launch of the Malaysian five-year National Financial Literacy Strategy 2019-2023, it’s high time for every Malaysian to place financial education at the forefront of their knowledge-enhancing agenda. What better way to start your financial literacy journey by developing your own personal financial plan.

What is financial planning?

“Financial planning is a process of determining whether and how an individual can meet life goals through the proper management of financial resources,” (Source: CFP)

Have you ever made holiday plans? Why? Because you want to ensure you achieve your vacation, maximize your time and money, and get what you wanted, correct? Another example would be anyone running a business would also need a business plan.

The keyword here is “plan”. When you want something, you do not own now, you will plan to get it. It’s the same with money. Almost everything in our daily lives needs money. Most working-class persons derive income from one source yet many ways to spend it. So we always want more money. Therefore, when we want more money, what do we need to do? Plan it!

Financial planning is not a static one-off action. It’s a journey, a continuous process. It’s about helping you make the right decisions about money that fit your needs so that you can achieve your financial goals.

The ultimate outcome of the financial planning process is your Personal Financial Plan.

“A financial plan is a comprehensive statement of an individual’s long-term objectives for security and well-being and detailed savings and investing strategy for achieving those objectives. An individual can create a financial plan independently or with the help of a certified financial planner.” (Source: Investopedia)

To craft your personal financial plan, a certified financial planner would take you through a seven-step process:

  1. Establish the relationship with your financial advisor
  2. Determine your financial and personal goals 
  3. Fact-finding/Data gathering (Where you stand now financially)
  4. Study/examine/analyse the data
  5. Create the Financial Plan
  6. Implement the plan
  7. Monitor and Review the Plan

Step 1: Establish a relationship with your financial advisor

This is the first meeting between you and the advisor; the purpose is to establish a close and trusting client/advisor relationship. During the face-to-face meeting, the advisor will explain:

  • the financial planning process and the services available to you,
  • both your responsibilities and the advisor’s responsibilities,
  • his /her experience and education background in financial planning. This is to assure you of his/her expertise in helping you achieve your financial goals,
  • the time scale of the relationship which is influenced by your goals; and
  • Fee details which you must understand and pay.

Step 2: Determine your financial and personal goals

Many individuals may have some savings and investments but are without specific financial objectives. It’s an unstructured money management model based on “whatever-extra-money-I-have” mentality. Though this is better than no savings, don’t you think an organized and disciplined approach with a financial destination in mind is a better choice? This is where a financial advisor can come in to help. 

To guide you in finding your “true” financial goals, your advisor will pose you a series of open-ended questions that cannot be answered by a simple yes or no. Examples, questions that touch on family financial planning like child educations cost, moving to a bigger house, taking care of aging parents, maintaining the current lifestyle and ensuring a comfortable retirement.

Keep your answers to these questions specific rather than generic. Resist general answers like “I want to be rich”. Instead, your responses should be something more like “I want to own a home costing around RM400k to RM500k in 5 years” or “I want to settle my credit card debt of RM60k in 4 years.”

Split your financial goals into three time periods: short-term (less than two years), mid-term (two to five years) and long-term (over five years).

To succeed, your goals must be realistic and achievable. Set S.M.A.R.T goals. Specific, Measurable, Achievable, Realistic and Timely. Don’t set lofty goals which will only set you up for failure!

Step 3: Fact-finding/Data gathering (Where you stand now financially)

After setting your goals (destination), next is to find out where you are at financially (starting point). This step entails the collection of various data and information about you and your finances, the focus of financial planning or the “discovery” process. The financial advisor needs these to analyse and recommend suitable actions plan and financial products to achieve your financial goals in step 1.

You will need to furnish all relevant personal and financial data such as lists of assets and liabilities (your net worth statement), cash flow statement, tax returns, record of securities transactions, insurance policies, wills, trusts, pension plans, etc.

Step 4: Study/examine/analyse the data

Time to dissect the data gathered and to see whether it can tie into your financial goals. The information collected can assist your financial advisor to come up with some basic assumptions.  

  • Are the goals sensible in relation to the current situation?
  • Or perhaps it’s more realistic to set a revised goal that makes sense and achievable.

Your advisor may also pinpoint financial issues such as excessive amounts of insurance or too little, high taxes, poor cash flow, or investments that are no longer viable to hold onto or that have lost the fight with inflation. Before finding the solutions, identify the problem areas first.

At this stage, don’t get discouraged if there are huge gaps in achieving your goals. It’s good to know now so you and your financial advisor can take remedial measures sooner.

Step 5: Create and Present the Financial Plan

Recommendations of which are high priority action items will be identified. Prioritization at this stage is necessary to tackle the important issues first. Remember, financial planning is an ongoing process. You will still have time to look at the lesser prioritized items once you have cleared or stabilized your higher priority items.

A typical financial plan will include:

  • Net worth statement
  • Cash flow statement
  • Financial plan recommendations:
    • Income tax strategies
    • Insurance detail analysis
    • Investments detail analysis
    • Estate plans review
    • Savings analysis
    • Debt reduction strategies
    • Budget

Step 6: Implement the Plan

Carry out the plan. Start doing that first action on your goal, for example, to reduce credit card debt to 0 by this year-end. Use your financial advisor for actions beyond your abilities because of their expertise and your time limitation (if you have a full-time job).

Step 7: Monitor and Review the Plan

A plan is not a one-stop static thing. Periodically monitor your plan to mark progress. Review the plan when it isn’t working out well for you. This can be for various reasons such as perhaps you had an unexpected financial situation come up. Whenever necessary, adapt it to reflect the current situation. And review it so you know when you need to or can start work on lesser priority items.

Conclusion

The most effective result is provided by the financial planning process which follows an appropriately specified and documented process. It is not a guarantee of financial independence or amassing immense wealth. But without it (no planning) your chances of achieving financial security is much, much less. Try asking those folks who failed to reach their goals.

An old adage “If you fail to plan, you’re planning to fail.”

 

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So, have you created your own personal financial plan? If not, get in touch with a financial advisor very soon.