Life comes but once. So, it’s quite important to do it right the first time around. This encompasses things like mental, physical, and fiscal development, which are not always up to you when you are younger.
But what becomes firmly your responsibility once you grow up is the economic side of the equation, even if you have parents or partners that are willing and able to support you.
Being intelligent about money and indulging long term finance planning is not only good for the individual but it also helps society at large by setting examples of adults who can effectively and level-headedly discharge their commitments with more time for higher thinking and tons of less stress.
This ultimately leads to a healthier lifestyle and prevents overload on the healthcare and legal system, among other benefits.
Need for financial planning: Does it really help?
When the markets crashed recently during the pandemic, was it better or worse for those who had saved in financial markets? What about when they crashed in 2008 or 2000? Or when they will ultimately crash again, because market highs and lows are inevitable?
Let’s look at this with an example of individual A and individual B. The latter is a chronic investor while individual A believes in living in the moment without planning for the future. They both have similar income and expense profiles for the sake of simplicity.
The pandemic rolls around the corner. Financial markets crash. Jobs are lost. And for those who contracted the virus or had a family member suffer through it, the financial and emotional cost was staggering.
About 30% of individual B’s savings are wiped off (stock markets lost about 34% source: Time). They lost their job and their child had a covid-19 scare but their remaining investments as a result of the long term finance planning were more than sufficient to tide them over.
Eventually, individual B was able to upskill during the time, managed to find a passive income stream while they were out of a job, and found work when things started to look up.
On the flip side, individual A had nothing to start with. So, the loss of a job hit very hard. Though the government did provide some aid in their case but it still wasn’t sufficient and they had to look to family and friends for support during crisis times.
Relationships were strained and tested and stress piled up high. They neither had the peace of mind nor the time to look for passive income methods online. Eventually, when things did turn around, they managed to land a job in the same position with the exception that they had plenty of debt added to their portfolio now.
This might seem like an extreme example but it is quite close to home for many who did not place value on financial forecasting before. People like individual B were among the minority but their faith in their financial management was reaffirmed.
This has led many other young professionals to seriously start considering financial planning to avert crises and find stability in future years.
Finance planning landscape
The framework for financial planning remains quite consistent no matter the tech advancement or geographical location. It was like that when our forefathers managed their money and it is the same whether a person lives in Europe or Sri Lanka. The building blocks include the following elements:
- Consider in-depth your finance setting: This is the starting point of all plans. What do you have at the moment? Your assets, your liabilities, your income, and your expenses. Put them all in front so you know where you stand from a financial point of view.
- Visualize what you want your money to achieve: AKA the goals. To achieve a semblance of stability, standard goals like having an emergency fund, retirement savings, home ownership, and health insurance are quite commonplace. Add to the mix what goals satisfy your specific circumstances like building your own business or bearing the burden of your children’s expense or marriages.
- Assess the present to build the future: The third step is to calculate your current inflows and outflows, which you need to tweak and adjust so you are in a position to provide for the long term finance planning.
- Make an actionable plan: You’ve got your goals set and position analyzed. That leaves you to engage your knowledge of money markets to decide how you will get to your goals. Or you could leave this step to a finance professional since they have experience and tools to better advise on your financials.
- Put it to work: The map is set and you know what you have to do; so, what are you waiting for? Hit the road running to achieve your milestones. But remember to practice discipline and not let minor setbacks deter you from your long-term targets.
- Monitor the progress: The work doesn’t end with the plan though. You might have par excellent money management skills but that doesn’t guarantee that the world will work as you thought it would. In face of setbacks and deviations, you will need to review and amend the plan at least annually.
To further refine your efforts in planning your fiscal future, you can consider your goals and the related action plans in the context of their timelines. Your short-term goals could look like less debt and an emergency fund. Or buying a car or a better phone.
Medium-term goals could include having a house of your own, splurging on a vacation someplace nice, or pursuing an expensive hobby like golfing or learning to fly a plane.
And long term finance planning goals are typically retirement plans and kids’ college funds as they come way later on in life. How identifying these goals helps the overall action plan is that you can consider what amount you need available when and what options you should choose for investing.
What do you need to do?
- Not all eggs in one basket
You probably understand the wisdom behind this one. If the stock market crashes, your bonds are still going to perform as expected and this will help cater to portfolio volatility. Even investing in stocks in the same sector, like tech or banks can present significant risks to an individual investor. Consider a balanced mix. Some money in bonds and savings accounts while the other rests in the stock market are ideal. But your understanding and preferences will decide the percentage of how much you’re willing to put where.
- Investing according to liquidity and risk profile
Now that you’ve already devised the timeline for your cash flows, you can judge how much money you’ll need in one year and how much in 2, 5, or 40 years. That clues you into the liquidity of cash you need to maintain at the right time.
The other aspect to consider is your risk appetite. If your savings are substantial with a small number of dependents, you may have the space to play for higher returns in exchange for higher risks. Alternatively, you might just be risk averse and would prefer safer shores than riskier ventures.
The thing to grasp is this: You can leave the money you’ll need in the short term in low-interest rate deposits that are highly liquid. But for longer-term targets, you could play a bit more on the edge and invest in the stock market while times are good and your retirement is still some time in the future.
- Re-calibrating annually or as needed
Even with such a detailed and well-designed plan, you’ll still hit roadblocks on the way. As long as you’re cognizant of the fact that your plan isn’t set in stone and the action plans may be amended to reflect new scenarios and estimates, you’ll be able to accomplish the targets you set for your dreams of a financially secure future.
Following these best practices is not going to be a walk in the park! Chances are you will need a lot of help and even more years before you can hone the skills needed to craft these budgeting and forecasting techniques.
But once you start practicing religiously, like individual B whom we discussed earlier, you’ll be in a better place to deal with crises and the inevitable retirement.
In a world so fraught with uncertainty, every concern, whether it’s an individual or a business entity struggles to navigate towards a more stable and triumphant future.
Though this article has been discussed in the context of the most basic unit of society i.e., the individual, in essence, the principles are the same for all organizations. You can not expect to come out on top if you can never rise from the day-to-day issues and focus on the bigger picture.
It is only with discipline, dedication, and sound long term finance planning that the future can be molded into a better version and our ideals of a stable and secure life can be realized.
