Long Term Financial Planning

There is a popular saying that goes like this, “he who fails to plan, plans to fail”. Having no financial plan is the worst financial plan you could have as it is the surest way to fail in your finances.

Downfall of no financial plan

The downfall of not having a financial plan are as follows:

Lifestyle creep: Having no financial plan is the surest way to suffer from lifestyle creep. Lifestyle creep is allowing your lifestyle to grow faster than your income. For instance, a sales man convinces you to buy more car than you can afford. When the first bill comes due, you find yourself robbing Peter to pay Paul.

Out of control debt: With an increase in lifestyle also comes a corresponding increase in debt

Paying more than your fair share of taxes: Without planning, you will definitely pay more in taxes than you ought to.

Creating your financial plan: Your wealth account

Your wealth account consists of assets less any liabilities. Assets increase your wealth while debt has the reverse effect.

  • Examples of assets are:
    • Investments
    • Retirement funds
  • Examples of debt/ liabilities are:
    • Mortgage
    • Car loan
    • Business Loans
    • Student loans
    • Credit card debt

To determine the net of what should be in your account you deduct your assets from your debt. The net amount in your wealth account is known as your net worth. Net worth is what you own minus what you owe. With a good financial plan, net worth should grow year over year. Net worth could decline at retirement or after a savings goal has been reached and expended.

Building your wealth account

Human choices are very fickle so gaining focus is a very important part of any wealth building strategy. This is why it is important to write down your goals and save it in a place you can see it often. We need that consistent reminder as to why we do what we do or we will give up easily.

To build your wealth account:

Take an inventory of all assets and debt

Building your wealth account starts by having a detailed list of what you own versus what you owe.

Create a budget

A budget is a way of telling your money where to go rather than your money telling you where to go.

Automate your savings

I have learned over the years that I cannot always trust myself to do the right thing all the time, as a result I have learned to automate the actions I want to consistently see applied in my life. For instance, I arrange for a certain amount of money be taken out from my main account and put into several accounts. I have my wealth savings fund, my vacation fund and my emergency fund. Every month, money gets automatically taken out of my main checking account and transferred to this savings account. The amount I take out is determined by a budget I make at the beginning of the year. So if I am planning an exotic vacation, I will compute how much I need to have in that fund by the vacation day and figure how to earn the extra money I need.

Minimize your debt

Debt is using today’s income to pay for yesterday’s expense. When you are in debt, you are caught up in the past. Moving into the future while taking care of the past is like running a marathon with your leg tied to the pole in the starting line. You are not going to get very far.

To minimize debt, I do not buy assets that have a fast diminishing return with debt. For example, a car once it leaves the car lot loses 20% of its value. Why would I want to keep paying for an asset with diminishing returns?

Educate yourself

Educating your mind is one of the best ways to increase your income. You do not have to engage in formal education to get educated. You can read books, take online classes, attend webinars, listen to podcast, etc. Be sure to educate your mind about various investment opportunities.

Invest wisely

The education you received from the step above will go a long way in helping you invest wisely. Use the income from your investments to make more income.

Plan to minimize taxes

You should have a certified public accountant you talk to on a regular basis about tax saving strategies.

After you have done the above, sit back and watch your wealth account grow. Having a cushion in your finances gives you more choices in life. There is also the added benefit of being able to say no to jobs you don’t like because you are not pressed for cash