Every one of us has both – short-term and long-term goals

Short term goals include catering to our immediate expenses, like buying a car. Long term goals are more about preparing for the bigger picture, like making a retirement plan or paying off our mortgage.

But, most of our goals are the same based on one thing – the requirement of money to meet these goals. At times… loads of it.

And often we face problems with financing these goals. Primarily because short-term and long-term goals require different amounts of investments and pre-planning.

So how do you make sure you overcome all these obstacles in your path without breaking a sweat?

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The answer is simple – through planning your finances by following a financial plan.

Devising a financial plan is equally important for all individuals across every age group.

Now, the question is, how do you get started with financial planning?

Let’s find out, shall we?

The 9 most important rules of financial planning

1) Understand your current financial situation by making a budget

The first step to any form of financial planning is about calculating the expenses involved, as accurately as possible. This is called budgeting.

Three of the most important factors you should consider while making a budget are:

A) Income details

This can split into three important points:

? The nature of your income
Is your income fixed? Or is it variable?
Fixed income corresponds to safety.
While, in the case variable income, you should consider the stability of your income.

? The income of your household
Are you the only one earning in your household?
If yes, then you should be extra careful while making a budget. You should also set some money apart for insuring your health.
If no, then you should also consider the above-mentioned points for the other earning members of your family.

? Your income channels/ streams
Do you have multiple channels of income?
While preparing a budget you should also consider the stability and reliability of all your sources of income.

B) Spending habits

Are you thrifty? Or, do you often overspend on things?
It is important that you be honest with yourself on this point while preparing a budget.

C) Calculating your liabilities

While making a budget or financial statement you also need to consider liabilities like loan installments, credit card bills, your tax obligations.

If you don’t take into account the nature and frequency of your expenses, liabilities you’ll either end up short on budget or underutilising your resources.

2) Start saving early

It is never too early to start saving.

Don’t think of it as the inability to use all of your resources.

Think of it as a necessary step to be able to upgrade your car or buy a new apartment without crippling your bank accounts, even after you retire.

The interest on the amount you save builds up over time. Since every financial institution compounds interest, the difference between starting to save from the age of 20 vs the age of 40 can be huge.

Let’s consider an example:

  • You start saving from the age of 20 and plan to retire at the age of 60.
  • You deposit an amount of R30,000 every year. Suppose, the interest rate is 3% and the interest is compounded every month.
  • So, at the age of 60, you will get around 2.3 million Rands.
  • Under the same circumstances, if you start at 30, you’ll get roughly 1.4 million Rands. And, if you start at 40, you’ll only get around R800,000.
  • As you can see, the difference here is monumental.

Another thing to consider while saving is the amount you save

If you’re trying a achieve a goal, it’s best you spend cautiously. This way you can meet your goal quicker.

3) Set up a contingency reserve and utilise surplus cash judiciously

A contingency reserve is like a backup. A wall you can lean on, in case things take a bad turn.

The most popular way of overcoming an unforeseen financially demanding situation is by borrowing from a bank.

But think about it. After the situation is resolved, you will be under the pressure of paying off your debts. This situation gets worse if your income from a channel diminishes or even worse, stops completely.

Sounds too imaginary?

Consider this…

  • You meet with a mishap, get admitted to a hospital and have to stop going to your office for a few months.
  • To tackle your medical charges, your family is forced to take a loan from the bank in case you don’t health insurance. After you recover, not only will you have to pay back the loan but also do so without having received payment for the last few months.
  • Also, due to lack of payments, you could have not saved while you were admitted. Chances are you may not be able to do so until you pay the bank off.
  • This can seriously backtrack your progress towards your goal.

Now imagine, you had some surplus funds saved up. Not only could you have saved your family the trouble but also you could’ve started saving again immediately after your recovery.

Another most important thing you need to consider is having an insurance for emergencies and set aside some surplus funds for insurance premiums.

If any surplus is left after contingency reserve and insurance only then think about investing.

4) Define a financial goal

We have already discussed short-term and long-term goals.

But, it is time for you to get down to the details of the same.

One of the most important points to consider while finalising a financial goal is the time in which you want to achieve the same. This will set the momentum at which you need to save up.

A thing to note is setting up a realistic goal. If preparing for your goal becomes too financial restrictive for you, then your chances of failing to meet the target increases drastically.

In other words, your goal should be SMART: Specific, Measurable, Achievable, Relevant and Timely.

5) Consider your investment options

You should consider your options very minutely when it comes to investments.

Investment encompasses a variety of forms. Such as mutual funds, fixed deposits, shares, even speculative instruments like forex trading and cryptocurrency.

All these forms of investments are different, based on two main points:

? Potential returns

This is the profits you can make from an investment.

Risks involved

Every investment involves some amount of risks involved – some are less riskier than others while others carry huge risks. Also, no matter the form of investment, risks and rewards are always directly proportional.

While making an investment, you should prioritise matching your risk tolerance. Comparing the gains comes second.

There are thousands of blogs, web pages and tutorials on every form of investment. While considering your options, make sure you go through a handful of these descriptions/ discussions to improve your understanding of the same.

You should always choose regulated entities while investing for security & safety of your funds – like if you want to trade forex you should only invest through FSCA regulated forex brokers and for share trading you need to only invest through JSE licensed brokers.

6) Devise an investment strategy

In order to invest properly, you should invest in a systematic manner.

Investing haphazardly will not only make it difficult for you to track your investments but also decrease the reward potential.

So it is important that you devise an investment plan based on your goals and risk appetite. Consult a financial advisor, if needed.

But, you should never let the risks involved in an investment option exceed your risk tolerance, even if it means not getting the desired amount of rewards.

7) Create a portfolio with diversification and asset allocation in mind

A portfolio is a collection of different financial assets and securities.

The gains and risks involved are different for each asset and security. But, cumulatively, the risks involved and rewards match the expectations of the owner.

While keeping the risks involved as low as desired, you should also allocate your resources wisely.

In other words, if you invest too much in one investment, the risks involved goes up too. This is because if your investment fails, you will lose all your money. This is why diversification is important while building and investment portfolio.

Another point to note is the maturity period of different investments. Maturity periods may range from a few months to a few decades.

The overall maturity period of your portfolio must match with that of your investment goals.

Constructing a portfolio needs advance understanding of different financial instruments. That’s why it is often recommended to seek a professional portfolio manager before moving forward.

8) Manage your liabilities

Your liabilities include any debts that you’re currently paying for or any other form of future expense other than necessities.

You should plan to settle any loans or EMIs that you may have as soon as possible before you start saving. If not, while constructing your budget, make sure to consider an amount separately to pay your debts off.

You should also consider your future expenses like paying for taxes and the education of your children. Try to estimate your expenses as accurately as you can while budgeting.

9) Monitor your progress

Even if you’re done with the above-mentioned points, it isn’t time to relax.

The work is only half-done. The rest lies in monitoring your progress.

No matter how accurate a budget you prepare or how profitable your investment portfolio is, if you don’t track your progress, you may soon lose sight of the bigger picture.

One way of tracking your progress is setting milestones in the path to your goal and giving yourself a deadline to achieve each of these milestones. If you can stick to the schedule strictly, nothing can stop you from getting closer to your dreams with every step.

In the end..

Now that you know what to do in planning your finances, you’re better equipped to make an educated and calculated decision.

Start spending thriftily so don’t have to after you retire. Start saving up so you can better fund the education of your children. Save up so you can live happily in the future, no matter the circumstances.

Content supplied by www.forexbrokers.co.za