The Basics of Financial Planning: The Last Step is Key

Financial planning is one of adulthood’s necessary evils. But it doesn’t have to be painful at all. If you’ve beginning your journey with financial literacy, here’s where to start.

Know what you have

Your net worth is essentially your assets minus liabilities. But getting a proper assessment can be more complicated than you may expect.

The first step of proper financial planning is to do a health check. A health check is a thorough assessment of your finances, with a trained financial advisor or service.

The type of information they use is an overview of your money, such as how much you earn, how much you save each month, and your accumulated savings.

This assessment includes your investment portfolio, assets like properties or vehicles, precious jewellery, and even stock options from your employer. Along with your loans and liabilities include all that you’ve borrowed, like your housing, motor, personal loans, and credit cards.

Be sure to make a note of insurance matters like what you’re covered for—and your options in the event you aren’t.

Know where your money is going

It’s difficult to know how much you can save if you don’t know what to spend less on. Identifying leakages in your spending is an essential part of your financial health assessment.

How much do you save with each paycheck? While a good gauge is to save 10% of your salary, it doesn’t apply to everyone. For instance, a single person without any dependents should instead be able to save 30 to 40% of their income, while someone supporting both parents and children may only be able to put aside 10% of their income.

Outside of savings, consider how much of your salary is going to loans. The book “Good Debt Bad Debt” outlines how some debts are part of an income-generating asset for your future, being “good debt”. While “bad debt” are lifestyle choices of excessive consumerism, and don’t grow your wealth. An example of good debt is a mortgage loan, and it’s recommended that you keep your loan instalments within 40% of your income.

Have an emergency fund

As we all know, the only certainty in life is uncertainty. For expected uncertainties, you could prepare for it as best you can. An emergency fund should be in the form of liquid cash and not investments.

(Read more: “What is an emergency fund”)

You should have at least three months worth of monthly expenses as liquid cash in case of unemployment (unexpected or expected), but we advise people to have at least six months of savings to feel comfortable truly.

For those who are higher up the corporate ladder or are freelancers, you should be prepared for 12 months, as it’s harder to find another equivalent job.

It’s also wise to have more cash in addition to that depending on your situation. For instance, if you have elderly parents without medical insurance or if you own a vehicle, which might need to go for unexpected repairs. It’s essential to account for all of these before you start using your savings for other purposes.

Figure out your dependents

Are there people financially dependent on you? If they are, quantify what they need in dollars. Then multiply that by the expected time period, you need to support them.

For instance, if you’re 30, have two siblings, and a mother who is partially dependent on you financially, you can make the following calculation. If your mother is 60 and has an average expectancy of 85, you have to account for 25 more years of support.

If she needs $1,000 every month for her expenses, against inflation of 2.5% per year, you would need to leave her approximately $420,000. If you don’t have that money right now, you could choose to buy cheap term insurance for 25 years to provide her with this sum.


This brings us to insurance coverage. It’s not wise to depend on your emergency funds for bigger financial losses, like a fire to your home or terminal illness.

Consider the monthly average cost of treating cancer of $17,000, or the bill of $150,000 for fire damage to a home. Considering these costs, it’s wiser to have insurance coverage, for a comparatively low premium. A ready source of income should you be sick and unemployed can be provided by insurance.

There are situations where you should buy insurance, and some where you may not, understand the concept of insurance as part of proper financial planning here.

Money for the future

The value of money in the future just isn’t the same as the present thanks to inflation. So while it’s great to keep money aside for our retirement or children’s education, we should keep the effects of inflation in mind. More importantly, we should also be thinking about how we can achieve our financial goals faster by making our money to work for us.

Investing through various instruments, fixed deposits and bonds for low risk short term goals or unit trusts and stocks are some ways to mitigate inflation. Either way, not doing anything isn’t the risk you want to take. Not if you want to be making ends meet each month. Whichever option you decide on, be sure to do a review on your portfolio at least once a year to ensure that your money is working towards your goals.

Rinse and repeat

Planning is not a one-time action. Changes happen all the time, and you need to re-adjust your plans to ensure they’re in line with your life goals. Get a status update every two years or when there are significant changes to your life, to review your financial pillars, and check if they’re still structurally sound.

4 thoughts on “The Basics of Financial Planning: The Last Step is Key

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