Financial Planning Model
Here is a Financial Planning model that is logical and easy to understand. Financial planning is nothing more that managing your money and assets to achieve things you want to do if your life. Think of your finances as fuel for your car to get where you want to go.
While many people want to save and invest (the top triangle) for luxuries like holidays, nice cars and a lifestyle, we need to look at building a strong financial foundation. Without a strong foundation to take care of circumstances beyond our control and the basics first, your financial plan might collapse.
There are 3 levels in your financial plan. The first level, the foundation, consists of 4 categories.
Level 1 The Foundation
Health
As the saying goes, “Your health is your wealth” is true. Without health, you can’t earn your wealth. Even if you have money but if you are not healthy, you need to spend your wealth to get back your health.
Income Replacement
Next, is Income Replacement. If you can’t work due to illness or disability, then you must have a way to replace the lost income. Ideally, if you have sufficient assets to generate the income for you, whether you work or not, then you are home free.
When you are in your 20’s to 40’s, most people are building up their assets until the assets can generate sufficient income. In the mean time, use insurance to help replace your lost earning capacity should disability happens.
Family Security
Third is family security. You need to secure your family members against sicknesses and also death of the breadwinner. Family members’ medical cost for parents, children or spouse is a huge drain on your finances. In many cases, it takes away money for other purposes. A prolonged stay in the hospital can drain away thousands of ringgit.
One time a customer spent 2 weeks in hospital for dengue and the bill came to around RM 15,000. So it is not only serious illness that cost big bucks.
The untimely death of a breadwinner removes family security. Imagine the double blow a family faces when the breadwinner dies plus the effect of no enough money at the same time! While money cannot replace anyone, it does help to put back lives into order.
Asset Protection
You should look into protecting what you already own for example, your home and the content, your car and any other property. Property that is damaged by fire, flood or stolen needs money to repair or replace. By insuring your property, you need not suffer a large financial setback.
Level 2 The Basics
Children Education
Children education is really expensive these days. Unless your children are smart and get into a public university, then it will cost a lot. You should start saving early. With compounding interest, by the time they need the money, you should have a large enough sum to cover for it.
With more and more people getting married and having children later in life, education needs will clash with retirement needs.
Retirement
The same goes for retirement except with retirement, you have the EPF savings to cover part of your retirement needs.
Do not be discouraged if the figure for children’s education and retirement seem too big to achieve. At the moment, you are calculating based on you present income. As time goes by, your skills and income should increase and so you can save more as time goes by to make up for any shortfall.
Also, the idea of retirement is changing. No longer do people quit their jobs at 55, stay home and watch television all day. Unless you want to retire and play golf everyday (which means you really need to have a big enough sum of money at retirement), many people are having a second career after retirement.
They do work they like to do to keep active and make use of their skills and experience that’s been accumulated. Consider this an alternative to fund your retirement.
Level 3 The Top Level
Here, you are saving and investing for your dreams and goals. After taking care of the foundation and the basic requirements, you can go buy your dream car or home if that is your desire.