If we can be disciplined to do that — prioritise our needs over our wants — we would be on the way to achieving financial freedom as well as peace of mind. Here then is a primer on setting of your goals so that you can provide the same in a meaningful manner to your financial planner.
Preparing A Laundry List
The first step in financial planning is communication. That's within the family first, so that a laundry list of all objectives is prepared. Your spouse surely needs to be involved, as much as your children, if they are at least teenagers. Let each one write all that they aspire for or dream about; reminding them not to forget their basic needs.
Against each of the desires, write down the amount and the time (year) when you wish to fulfil them. If you cannot estimate the future value of the objective, write the current value — make sure that is uniformly done for all items on the list.
Separate The Needs And Wants
Next, ask each one to bifurcate these desires into needs and wants. After that is done, let each rank the order of importance of these desires. I am sure your son or daughter will insist that he 'needs' the Ferrari, but you have to highlight that his higher education should get higher priority. This will also provide an opportunity for the family to identify a common list of priorities.
List Liabilities/ Commitments
Your current commitments and liabilities need to be listed with the current amount outstanding, the frequency and amount of payment and when the commitment comes to an end. If you have listed a personal loan as one of the liabilities, make sure that the interest payments, if they are to be met separately, are also listed.
Further, any personal borrowings from the family also need to be listed, though there may be flexibility in repayment of both principal and interest.
Track Of Expenses?
Even the most meticulous individual seems to falter when it comes to determining expenses incurred on a regular basis. It is also extremely important to classify these expenses, so that it is possible to determine the scope available for reducing expenses, should a need arise. For example, school fees will be fixed, but the budget for eating out can be adjusted.
INFLATION AND FINANCIAL GOALS?
We are aware that the official rate of inflation now published by the government on a monthly basis may not reflect the increase of the cost of goods and services that are consumed by me. We also realise that some items like education costs rise at a faster pace than others, and hence, applying a uniform inflation rate may not reflect an accurate future value of the goal.
So now we have three key components for a financial plan in place: your financial objectives, your liabilities and your expenses. Next week, we shall focus on how your assets and the income fit into your financial plan. Till then, don't forget to do the homework stated above.
