You know the old joke — it’s not what you earn, it’s what you keep. Well, fast-track young managers in Asia who want the last laugh will start putting together a financial plan that includes investment, tax, and offshore banking components. But the most important step in real financial planning is making the decision to build a formal plan. Everyone thinks that they have a plan – but most of them are really just dreams and wishes.
If you’ve reached the point in life where you can start thinking about your future, then you need to think about writing a formal financial plan.
Before we talk about what a financial plan IS, let’s be clear on what a plan is NOT.
2 traps to avoid:
Household budgeting is not planning.
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- It’s important. Do it. But it’s not the same thing as long term planning. A good financial plan will take into account the next 50 years or so, but it’s the first 10 years that are the most challenging. Young people get into the habit of living hand-to-mouth as they build their careers. It’s cute until you’re 25, then its time to act like you know you’re supposed to have a clue. Hint: Your goal is not to have a lot left over at the end of the month to put into savings – your goal is to start with a big amount already allocated for investment.
Quantum Finance.
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- The other extreme is just as bad. Some people are so confident in their future earnings stream exploding into the stratosphere five years from now that even trying to plan for the future makes no sense. Entrepreneurs and young bankers are famous for this. “Why scrimp to save $1,000 when I’ll be earning (insert ludicrous sum here) in 5 years?” This is not planning. Put down the Maxim and do some math.
The SML Method: Short, Medium and Long term commitments.
A sensible approach to building a plan is to divide up your financial future into three zones. Short, Medium and Long.
Then ask yourself – what are the big expenses or investments that you can plan for in the next 3 years, the next 7 years, and for 10 years out? There are always surprises, but there are some big bills coming due that we are certain of. Start there.
Don’t overlook these common expenses:
Short term:
Emergency fund of cash
Wedding / divorce
Babies (see above)
Moving expenses
Medium term:
Housing
Education / tuition
Investment property
Long term:
Retirement age
Retirement income
Lifestyle
Get as specific as possible, and use the process as a framework for discussion – not a fill-in-the-blanks quiz. Prioritize, and then get ready to make real choices.