What Is Personal Financial Planning And Why Is It Important?

Personal Financial Planning refers to a systematic approach to managing one’s finances by allocating resources optimally in an effort to maximize the use of these resources in order to achieve one’s financial goals and objectives.

Having a sound personal financial plan is important because it helps reduce and possibly eliminate financial distress arising from various responsibilities and unexpected situations.

It is key to note that financial planning largely depends on one’s age, income level, risk tolerance, the responsibilities at hand, and future objectives.

These factors have led to the broad classification of investors into three phases:

Accumulation Phase: It constitutes the young population of ages 18- 30. Their net worth is low and restricts them to low-priced investments. Nevertheless, they have a high-risk tolerance because of their long-term investment lifespan since a loss incurred during this phase can be recovered in the next investment cycle,

Consolidation Phase: It encompasses the middle age income earners of ages 30-55. At this stage, the net worth of individuals is relatively high since payment of school loans does not burden them like those in the previous stage. They can afford a range of investment commodities. However, their risk tolerance is lower than that of individuals in the accumulation phase. They seek out ventures that would not imbalance their accumulated capital while still investing to offset inflationary rates, and,

Spending/ Gifting Phase: Most people at this stage are retired and are of age 55 and beyond. Their source of income is majorly from the investments held. They have a low-risk tolerance and prefer little to no-risk investments.

It is critical to evaluate these three phases before launching a financial map. Once an individual identifies the appropriate classification, one should be able to determine the personal optimal plan. After this evaluation, we describe the process of creating a financial plan.

Section 2: The Financial Planning Process

Personal financial planning is a continuous process founded on four pillars namely; budgeting, saving, investing, and debt management.

The planning process takes into account every aspect of your financial situation and how they affect your ability to achieve your goals and objectives.

Achieving financial freedom can be through the following steps:

Assessment: This step involves identifying factors that are likely to affect one’s financial plan by evaluating his/her income, spending habits, lifestyle and seeing how each of them will affect their financial plan,

Goal Setting: In this step, one should outline their financial end goal before developing financial action plans. An individual could have multiple goals, some long-term and others are short-term. Usually, financial goals and priorities attached to them differ by person and change over time and therefore it influences the path one takes towards the achievement of their financial objective.

Your financial planning goals should be measurable and achievable by one or a combination of the following four practices:

Saving – Saving basically means deferred consumption and entails consuming less out of a given amount of resources in the present in order to consume more in the future by setting aside part of your income in some form of asset. Efficient saving requires discipline. While saving, it is important to treat savings as a necessary expense and have a plan. Here are a few tips to guide you. Firstly, save with a goal. Secondly, save first, and then spend what you have left. Thirdly, don’t just save, invest,

Investing – Saving is often confused with investing, but they are not the same. Saving allows you to earn a lower return but with no risk involved, while investing gives a higher return but at the risk of loss. Investing involves the purchase of an asset with the hope of generating some income in the future or the asset appreciating hence being able to sell it at a profit. There are different asset classes that one can consider and an investor will choose the different vehicles based on their risk appetite, the returns expected, and the liquidity requirement. As you invest, it is important to diversify one’s portfolio through investing in different instruments in a bid to mitigate risk,

Debt and Debt Management – Is debt good or not? Debt is only good if used towards an investment or for future financial gains such as business, education, or property. However, it is advisable to take up debt for investment only if the economic rate of return, which is simply how an investment’s economic benefits compare to its costs, is able to finance the debt repayment.

Here are a few do’s and don’ts for debt management;

Plan before you borrow,

You should never use more than 1/3 of your net income in loan repayment,