In order to achieve one’s life dreams, financial institutions, financial media, and many financial planners emphasize the importance of financial planning. However, many individuals often face challenges in implementing their plans. Why is that?
Reason 1: Unclear Goals
- Goals that are unclear or unrealistic, such as deposit amounts or retirement funds, can lead to distraction or loss of motivation. Lack of clear goals makes it challenging to stick to a financial plan.
Reason 2: Lack of Budget Planning
- Budget planning is the foundation of financial success, yet many people overlook it. Without a precise budget plan, effective control over spending, saving, and investing may be compromised, leading to financial difficulties.
Reason 3: Lack of Discipline
- Implementing a financial plan requires discipline and patience. While individuals may be enthusiastic at the beginning, over time, they might lose motivation or struggle to maintain financial discipline. This can result in poor financial decisions or an inability to adhere to the plan.
How to Ensure Practical Execution of Financial Planning? Four Simple Steps and Ten Tips:
Step 1: Define Financial Goals
Clearly set financial goals such as homeownership, retirement savings, children’s education funds, etc. These goals should be specific, measurable, and have a time limit.
- Retirement Age Daily Income and Expenses: Financial goals must incorporate daily income and expenses, and budget management should be controlled in daily life.
- After setting financial goals, you can calculate the minimum rate of return needed to achieve them to understand the feasibility of reaching those goals. For example, if the calculated minimum rate of return is 0%, congratulations, you can achieve it by not making any investments and keeping your savings in a deposit. If the minimum rate of return is 20%, it means achieving Buffett-like investment performance is necessary to reach the goal.
- Prioritizing Financial Goals: You can have various goals simultaneously, such as buying a house, retirement, children’s education, daily expenses, or even traveling the world. However, it’s essential to determine the priority of these goals. This allows you to understand whether, in adverse circumstances, you can cover daily family expenses, ensure your children’s smooth education, and serve as a basis for alertness and self-motivation, leading to seeking external assistance early on.
- Deciding Life Insurance Coverage: Financial goals can be divided into personal consumption and family responsibilities, based on whether the financial goals need to be achieved upon the end of life. For example, children’s education and daily expenses fall under family responsibilities. Discounting family responsibility goals to today’s value determines the life insurance coverage you need.
Step 2: Develop an Annual Budget
Financial goals serve as long-term guidance, while a budget is a tool for controlling daily income and expenses. Establishing a reasonable budget involves breaking down income and expenditure items, ensuring that savings are a significant component of your budget. Budget control should be integrated into daily life needs and accounting habits, understanding whether this month’s expenses and income align with the budget. If there is overspending, it’s necessary to tighten expenditures for the month.
- Monthly Budget Amount Control: A more flexible approach is to calculate based on the previous month’s ending balance accumulated to the current month. A more strict approach is to start fresh with a zero balance each month. You can decide which method to use based on your situation.
- Automated Income and Expense Recording: The most cumbersome part of budget control is recording monthly income and expenses. Cloud invoices from the Ministry of Finance, financial software available on the market, can assist in automatically recording these transactions. Additionally, regular income and expense items can be automatically reminded and recorded through accounting software.
- Automated Budget Creation: When initially establishing a budget, it relies on personal memory to set budget amounts for different categories. If you’ve been keeping records for several months, financial software can automatically calculate the average monthly amount for each income and expense category, serving as a reference when establishing your budget.
Step 3: Savings and Investments
Determine the amount you can save each month and, based on the investment return rate set during financial goal planning, choose appropriate investment vehicles such as stocks, bonds, funds, etc. For specific details, consult with financial institutions or your financial advisor.
- Determining the Return on Investment for Achieving Financial Goals: One of the most common challenges in implementing financial planning is assessing whether your investment performance, including funds and stocks transactions, has indeed achieved the targeted rate of return. This is crucial for determining whether financial planning goals can be met and whether external investment advice should be sought.
- Financial software available in the market can calculate the Time-Weighted Rate of Return, faithfully presenting your actual investment return rate. This helps assess whether the set rate of return for financial goal achievement is met.
Step 4: Monitor and Adjust
Regularly monitor your financial situation, assess whether your progress aligns with the expected goals, and make adjustments as needed. Modifications to financial goals may be necessary due to changes in family circumstances. Regular adjustments and revisions to financial goals are essential to ensure the continued effectiveness of your financial plan.
- The feasibility of achieving financial goals is determined by the Asset Achievement Rate: Financial goals are executed using your own funds, not based on how much you spent or earned last month. Therefore, examining the current value of your assets and comparing it to the assets required to achieve financial goals—the Asset Achievement Rate—is a simple and effective indicator of whether financial goals are achievable. This indicator serves as a solid foundation for evaluating financial goals at any point in time, providing a basis for early adjustments rather than realizing during the execution of financial goals that they cannot be achieved.
Analysis of Insufficient Asset Achievement Rate: When the Asset Achievement Rate falls short, hindering the completion of financial goals, it is crucial to understand whether the issue stems from insufficient income, excessive expenses, or poor investment returns. Different causes require different approaches, and analyzing the reasons enables the adoption of appropriate measures to address the specific issues.
The effectiveness of financial planning depends on your discipline in execution. Utilizing appropriate tools and automation can simplify the process, allowing you to save valuable time and energy. This way, you can focus on achieving your dreams and enjoying the fruits of your financial goals.
Vision Money Practical Case Study – Easily Completing the Four Steps of Financial Planning