By Emeka Anaeto, Business Editor
As the popular saying goes, ‘If you fail to plan you have planned to fail’!
The content of this write-up assumes the reader is already conversant with the concept of financial planning and is already making some efforts in this very important area of anyone’s life.
But basically financial planning presupposes that you want to protect your finances against uncertainty.
Have a plan, Be rich
In other words, you plan to be rich and not wait until you are rich before planning your finances, otherwise you will never be rich.
A plan acts as a guide through your financial journey and, even if domestic and external upheavals dent your investments, it will help you get back on track.
At the macro level, planning affects every aspect of personal finance.
It can cut losses, enhance gains, and avoid the pain and panic of a financial or lifestage crisis.
At another level, a plan is a simple matter of listing out your needs and wants, and deploying the money in right avenues so that you have it when you need it.
As a first step, calculate your existing worth and identify the goals for which you will require money in the future. Calculate the exact amount required for each goal after factoring in inflation and the time horizon in which you want it.
Find out your risk-taking ability and then pick the instruments you want to invest in (asset allocation).
Link your investments to goals and you won’t have to scrounge around for money when you need it.
Build a plan the while you are employed or at the onset of your entrepreneurship life.
More importantly, it will help you gain from the power of compounding. So if you wake up to the need of a retirement kitty at 40, you’re likely to save much less than if you started at 25. It is likely that your planning will go for a toss in a market collapse like that of 2008, but will typically stand you in good stead through most ups and downs.
Secure your family & finances
Most people are so intent on investing and building assets that they forget to cover their risks. Since it’s crucial to secure your family and finances by creating an adequate insurance portfolio, this is the second constant that does not change with time.
A majority of the people buy insurance to save tax and as an investment, with life insurance the second most favoured investment destination after fixed deposits, accounting for 25% of the wealth of small investors.
However, it’s important that you don’t mix your insurance and invesments. The base of your insurance pyramid should comprise pure protection plans.
These cover the risk of death (term plans), health issues (medical plans) and accidents (accident/disability covers).
The amount of cover you take, be it life or health will depend on your lifestage, income, dependants and requirements. Next, consider insurance policies that can help you reach your goals. These include traditional (endowment) and child plans, and finally, buy plans that can assist you in creating wealth.
The other important insurance plans that you should buy are those that cover real estate and household content. Look at it as a way of reducing your losses and increasing your gains. Take the help of a planner or tax professional if you need, but start on time.
Make a calendar for each because procrastinating will not only result in confusion, but also losses and penalties.
Monitor your investments
Creating a plan and building a portfolio may go to waste if you do not monitor it periodically. A review is essential to mark the progress towards your goals and take corrective measures, if required. As critical as a medical check-up, you should monitor the investments on a quarterly basis for short-term goals, and annually for long-term goals.
Be aware, stay alert
The more things change, the more this rule holds. A good financial plan not only means investing in the right avenues and monitoring the plan’s progress, but also ensuring that you don’t lose your hard-earned money to frauds, identity theft and sheer ignorance. Financial knowledge and caution can translate into higher gains and fewer losses for you in any market condition.
You can start by taking note of the various fees and charges that are straining your budget and reducing your savings. Whether it’s credit card usage or travel planning, banking or realty transations, make sure you don’t give away more than you should.
Next, ensure you don’t invest in an instrument you know nothing about, especially when it comes to stock investments.
Most experts opine that mutual funds are a better and more secure way to invest in equity because your money is being handled by seasoned professionals.
Similarly, it is essential to stay abreast of the new tax rules and investing schemes to maximise your savings. If you do not know the various tax deductions you can avail of, you are whittling away your savings, even incurring losses that you could have set off against your gains.
Most Nigerians think they don’t need to pay tax, but recent developments and with your foray into investing you cannot avoid it. So plan for it.