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A successful financial plan that is specifically tailored to meet your needs and budget can help you weather the storm and come out even stronger in any economic climate. At home, we’ve created the five-step H-E-A-R-T process for developing a sound financial plan. Keep calm. Your finances will survive if you put your heart into financial planning.
What is a Financial Plan?
Investopedia defines a successful financial plan as “a comprehensive statement of an individual’s long-term objectives for security and well-being and a detailed savings and investing strategy for achieving those objectives.” It is essentially a long-term strategy for helping you achieve wealth.
Using the H-E-A-R-T Strategy for YOUR Financial Plan
You don’t need to be a financial wiz to get your successful financial plan right. In fact, there really isn’t a one-size-fits-all strategy. The right financial plan is what works best for your unique needs and circumstances. Here’s how the H-E-A-R-T strategy works to give you a headstart with your financial planning.
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H- Have the Financial Preliminaries
Investments are long-term strategies for building wealth. You shouldn’t try to become an investor if your plan is to withdraw money the moment there is an emergency. There are three financial preliminaries that you’ll need if you want to successfully build lasting wealth.
Cash Reserves (Rainy Day Fund)
Your rainy day fund is your most liquid asset. Put simply, it’s the money that you can access the quickest. A general rule of thumb is to ensure that you have at least the equivalent of three months worth of your salary saved in your rainy day fund.
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Cash reserves? Pssh! You can’t even trust yourself with your own salary much less with money that you’re supposed to keep safely tucked away. The new Samsung Galaxy S20 is out and you need one of those!
Before you list all the excuses for not being able to create cash reserves, here’s a tip.
Quick Tip: Set up an automatic deduction of 10 to 20 percent of your salary from your bank account to a financial goals bank account that you can’t easily access without a penalty. You can consult with your personal banker to set up this special account.
The money is gone before you get a chance to use it. It gets some breathing room to grow so that you have a nice rainy day fund tucked away.
Health Insurance
Health care is very expensive and can catch you completely off guard. You may think that you’re perfectly healthy but a medical emergency can occur at any time. Poof! The investments you have been so diligently pursuing are now funding your rising medical bills.
Comprehensive health insurance removes some of the burden. Sure, the monthly premium can add a strain on your budget but think about the long-term financial strain of a medical emergency. The trick is to find the right health insurance package that can give you the most coverage at an affordable cost.
Quick Tip: Use a health insurance comparison tool, such as eHealth, to find the right health insurance for you.
Life Insurance
Life insurance is important if you want to create generational wealth. Some life insurance policies also come with a mandatory savings component which provides you with even more stored cash that you can benefit from while you’re alive.
Quick Tip: Use a life insurance comparison tool, such as NerdWallet, to find the right health insurance for you.
E- Establish Your Financial Goals and Risk Appetite
This is a step that can be completed simultaneously with step one. There are three stages in the investor’s life cycle:
● Accumulation – Your expenses are high in proportion to your income and your main focus is on accumulating wealth so that you can purchase a house or car in the short term and save for retirement and/or your children’s education in the long-term. You’re young (usually 40 years old or less) and can, therefore, benefit from higher returns of riskier investments since you have a longer period in which to invest.
● Consolidation – Your income has greatly exceeded your expenses. You’re somewhere between 40 and 60 years old and are more concerned with planning family vacations and funding your children’s college education in the short-term while saving towards retirement in the long-term.
● Gifting – You’ve reached your golden years of retirement. Therefore, your aim is to pass on wealth to your loved ones.
Which stage best describes you? What are your short and long term goals based on the stage you’re in? Do you have other financial goals that you’d want to add?
Once you’ve identified the stage, you need to determine your risk appetite. Higher risk means greater rewards but also greater losses. Are you a low, medium or high risk investor?
Related Read: Paying Off Debt or Investing your Money
A- Activate Your Budget
You may think that budgeting is overrated. It’s not. Budgeting can help you keep tabs on your finances and better manage your money. The Chief Financial Officer (CFO) of your organisation depends heavily on budgeting to make financial projections. Why shouldn’t you create one for your personal finances?
Quick Tip: Use a budget tracking app, such as Mint, to make budget creation and tracking quick and simple. Your budget doesn’t need to be a complicated spreadsheet!
R- Reach For a Diversified Portfolio
Any financial guru will tell you that a diversified portfolio minimises risk. You should invest in a mixture of bonds, foreign exchange, stocks, real estate and financial derivatives if you want the best chance of building wealth regardless of the economic climate. The 20 percent that you’ve been using monthly to build your rainy day fund can be diverted to your investment portfolio when you have established enough cash reserves.
Quick Tip: Some “relatively” safe investments include bonds, unit trusts and index funds. Include them in your portfolio along the right proportion of risky assets for your level of risk tolerance. Have a discussion with an investment advisor so that he or she can create an Investment Policy Statement (IPS) that meets your unique needs and preferences.
Related Read: A complete guide to start Investing online
T- Track Your Progress
A successful financial plan isn’t something you create once and leave for the powers-at-be to do what they will. Your plan should be evaluated at least once per year to determine how close you are to achieving your financial goals. Make the necessary adjustments if you aren’t.
Put Your Heart Into Your successful Financial Plan
Personal finance shouldn’t be taken lightly. You’ve been dreaming about achieving success. Use the H-E-A-R-T strategy to create a successful financial plan that will make that success a reality.
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