Years ago, the financial life of the average family was relatively uncomplicated. People worked for the same company most of their lives, lived a few years in retirement on Social Security and their pension, and passed their modest estate on to their children. However, increased longevity, changing demographics, and a more complex, dynamic financial world have changed all that.
Consider these tough financial facts:
- Many of today's retirees will live 30 years or more in retirement - requiring far more financial resources to maintain their desired lifestyle.
- Social Security and company pensions may no longer provide the majority of your retirement income.
- Tax laws change almost annually.
- Downsizing companies no longer provide "cradle-to-the-grave" benefits or job security. The average American changes jobs seven times in a lifetime, and millions are self-employed. This demands new approaches towards savings, retirement, taxes, and estate planning.
- With couples having children later in life, many couples are "sandwiched" between paying for college and helping their elderly parents, while also trying to save for their own retirement.
Here are the 6 Basic Steps to Financial Planning
(1) The financial planner clarifies the client’s present situation by collecting and assessing all relevant financial information.
This includes:
net worth statement
cash flow statement
insurance policies
tax returns
wills
powers of attorney
investment portfolio and transactions
employee benefit plans
trust agreements
pension statements
basic family information (name, age, marital status, employment history, details of the children’s birth dates and other qualitative details)
Essentially this step summarizes where the client is today. An individual’s current situation is a result of the cumulative effects of all of the financial decisions and transactions that have occurred in the past up until the current time.
(2) The financial planner helps identify both financial and personal goals and objectives as well as clarify the client’s financial and personal values and attitudes. These may include providing for children’s education, supporting elderly parents or relieving immediate financial pressures which would help maintain the client’s current lifestyle and provide for retirement. These considerations are important in determining the best financial planning strategy. Any goals established should be:
Specific. Otherwise they are not goals, they are merely dreams. “I require 5,000,000 by my 65th birthday” is an example of a specific goal. “I want to be rich when I retire” is a dream, not a goal.
Measurable. Financial goals are easily measurable since pesos and centavos can be counted.
Realistic and attainable. In order for a goal to be achieved, it must be within the realm of reason. To accumulate P10 million by age 65, if one is currently age 64, and has no savings may be attainable by winning a lottery however; this is unrealistic. Conversely, for a 25-year-old to accumulate P10 million by age 65 through saving and investing is probably both attainable and realistic.
Time bound. All goals should be time bound in order to track progress towards the goal’s completion and to provide feedback. Corrections should be made in the action plan therefore maximizing the probability of success. If goals are determined to be unattainable and/or unrealistic, the individual can do one or more of the following to get back on track:
reduce discretionary expenditures,
increase income,
choose more aggressive investments, with potentially higher investment returns,
increase the time-frame over which to obtain the goal, or
reduce the peso value of the goal.
(3) The financial planner identifies financial problems that create barriers to achieving financial independence. Problem areas can include too little or too much insurance coverage, or a high tax burden. The client’s cash flow may be inadequate, or the current investments may not be winning the battle with changing economic times. These possible problem areas must be identified before solutions can be found.
(4) The financial planner provides written recommendations and alternative solutions. The length of the recommendations will vary with the complexity of one’s individual situation, but they should always be structured to meet the client’s needs without undue emphasis on purchasing certain investment products.
(5) The financial planner should assist in either actually executing the recommendations, or in coordinating their execution with other knowledgeable professionals. A financial plan is only helpful if the recommendations are put into action. Implementing the right strategy will help to reach the desired goals and objectives.
(6) The financial planner provides periodic review and revision of the plan to assure that the goals are achieved. Your financial situation should be re-assessed at least once a year to account for changes in life and current economic conditions.
The preliminary assessment should include determining the current financial situation, income and spending patterns, family obligations, and goals and objectives. In reality, although the adviser may be dealing primarily with one individual, he or she represents an entire household. The financial adviser should ensure that all concepts introduced are fully understood.
Privacy issues, which are paramount to some, should be addressed at this stage to ensure that the planner is able to obtain enough information to develop the financial plan.
The initial planning stages normally involve a meeting with the client to discuss the most important issues. Often, a questionnaire is used to quantify cash flow, current financial position, and goals. The development of a financial plan also involves an assessment of future expenses, obligations, earning or income prospects, and financial risk. Any constraints are noted at this time in order to facilitate the plan.
Unlike institutional investment, and with the exception of registered retirement savings plans, individual investment is not governed by legislation as to the type and mix of an investment portfolio. Individual investors can and do hold a variety of investments, some considerably less conservative than others. However, constraints of the non-legislated type are more likely to be encountered. Types and sources of constraints that a financial planner may encounter include:
liquidity;
taxation;
time horizon;
risk tolerance (either perceived or actual);
age, health, and personal financial situation;
previous investing experience; and
client’s income (source and magnitude, similar to the concept of “human capital”).
Once a draft version of the financial plan has been produced, it is discussed for final agreement. Any concepts that remain unclear to the client should be explained clearly. If it appears to meet the needs and objectives, it may be implemented.
Interested in how I can help you?
Get in touch....
(43-681) 10 262-546
jelloso@gmail.com
jay_elloso@yahoo.com
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