By: Welile Dludlu (Financial Planner and Debt Counsellor)
The Importance of Financial Literacy
In a world where financial decisions impact every aspect of our lives, from securing a home to planning for retirement, financial literacy is not just an advantage but a necessity. The traditional education system, while valuable, often falls short in equipping us with skills needed to navigate the complexities of personal finance. This gap leaves many vulnerable to debt, poor investment choices, and financial insecurity. It then becomes important to take a step back and look into the issues of money and financial literacy with intent. It is with good reason that in this column we explore the importance of personal financial planning.
Financial Planning Defined
Normally people think it’s not really possible to fulfill their dreams and goals without having a high salary or belonging to a rich family. That is not true. With help or the use of financial planning, you can achieve your dreams and goals.
What is financial planning, and why do you need one? Why is it important to have a plan before making financial decisions?
Let us start with a simple definition. Financial planning is simply a road map of how you get financially from where you are now (current financial situation) to a financial goal in the future. Or for a more detailed definition, financial planning is an ongoing process that considers your current financial circumstances and projects what resources they will need to reach your financial goal. It also contains a strategy for reaching your goals within the period you choose.
So financial planning is not just about money, but it is all about life. It is about fulfilling your dreams, goals, and aspirations and actually enjoying fulfilling them.
• Your current finances mean everything that constitutes your money today: income, expenses, savings, assets, and liabilities.
• Your future financial goals could be higher education, buying a house, planning for retirement, saving for marriage, or a child’s education.
Achieving these will not come by just investing a bit of money here and there. It requires a clear and detailed plan.
The Right Time to Start
“Better late than never” is an appropriate phrase. For those who have not yet started planning their finances but now wish to have money for everything—children’s education, clearing debts, secure retirement, and emergencies—the right time to start is now. Otherwise, some would advise to start this process from the day you receive your first paycheck. Maybe earlier.
Where to Begin?
There are three major components in the financial planning process: Current Resources (CR), Investment Options (IO), and Financial Goals (FG).
Put: CR + IO = FG.
Here, you may want to first make note of your financial goals and their priorities. Then look deep into your current financial situation, find the right investment vehicles, and remember to monitor them regularly. If you need help, a financial advisor may guide you.
Analyzing Your Current Financial Situation
It is important to know your current financial situation. Your cash flow statement and net worth are key to financial planning.
• Cash flow statement: Provides full information on your income and expenditure.
• Net worth statement: Provides an overall picture of your assets and liabilities.
These two will paint the actual picture of your current financial situation and help you make realistic financial goals. Update them regularly. Note that these two documents do not replace each other, but they are supportive of each other.
The Role of Budgeting
In financial planning, budgeting plays a critical part. Budgeting will give an actual picture of your expenses and mainly spending habits. This will help you plan your spending habits and expenses more efficiently.
If you are not sure where you are spending your money on a monthly basis, just track your spending habits. This may sound ridiculous, but believe me, it will help you reduce unnecessary spending.
Setting Financial Goals
You must understand and identify your desires and goals. The efficiency of the plan depends on the clarity of your aims. Listing down your goals might assist you in getting clarity. Write your goals and be specific. This will help you visualize your goals. They should be specific and realistic. Once goals are listed, it’s time to list them according to priority.
Time Matters
Unless you put time into your goals, they just remain dreams.
• Short-term goals: Achievable within the next 5 years. Examples: settlement of antecedent debts, purchasing luxury or small assets.
• Medium-term goals: Achievable in 5–10 years. Examples: becoming an entrepreneur, purchasing property, or other high-investment goals.
• Long-term goals: Over 10 years. Examples: retirement, children’s education.
Setting SMART Goals
• Specific: “I want to buy a motor vehicle within a year,” rather than “I want to own some vehicle someday.”
• Measurable: “I want to set aside E1,000 every month in my savings account,” instead of “I want to save a lot of money.”
• Achievable: If your net earnings are around E10,000 a month, then saving E1,000 is more achievable than saving E100 or E8,000 every month.
• Realistic: Goals should energize, not discourage.
• Time-bound: “I want to have saved E15,000 by the end of this year.”
Implementation
Now that you know your needs, time, and resources to reach your financial goals, it’s time to implement your plan. But if you look carefully, you may need the right investment vehicles to achieve your goals (investing). You may also want to protect your dreams (insurance) and later realize you need to have a document stating how you would want your assets handled in the unfortunate event of your passing (estate planning).Financial planning covers all these areas and more. We hope to explore this over subsequent articles.
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