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The key to gaining an edge over the average- who is grappling with finance and money concerns is through achieving first-rate ‘financial literacy’, which reduces any dependence on accountants, financial advisors, etc. So that you can take control and start to manage and direct your own personal finances. Knowing and understanding the 5 main financial needs of life according to classic financial planning is a good starting point on this journey.
5 Main Personal Finance Needs in Life
in classic financial planning 5 Defined Financial Needs A specific person will have it, often at an estimated time frame.
I think it might be useful to list the following 5 financial needs in front of you with a back of the napkin checklist and then ask yourself what you can do to make sure that you meet each of these 5 financial needs. Actively addressing:
- Savings i.e. the financial need to accumulate a lump sum amount from surplus income (usually saved from earned income) to meet a financial objective and/or to build a rainy day fund. An example of this would be if you are saving up a down-payment to buy a home at some stage in the near future. Another example of saving is building an emergency fund (eg setting aside 6 months of living expenses). You can also start using these funds for a longer term purpose such as building a rainy day or retirement fund.
- Investment i.e. the financial need to invest a lump sum amount that you do not need for a specified period of time, in order to earn better returns than standard savings. A common example of this is investing the capital amount in bonds or stocks in order to generate moderate to high returns. Another example of this requirement could be where you have recently retired and received a lump sum retirement benefit and want to invest it appropriately. You will have the financial need to invest this lump sum amount in the most appropriate manner (taking into account your age, risk profile and financial goals) so as to maximize your capital return and/or generate future (passive) streams Can go ) Income.
- Security i.e. the financial need to provide financially for some unforeseen event in life, such as ill health or death, leading to a total cessation of earned income for you and/or your dependents. An example of this is when you take out a mortgage, you will take out a life insurance policy (Mortgage Protection Payment Insurance) which will ensure that the mortgage is paid in full if you die before the end of the mortgage term. You can “protect” yourself by building sources of passive and portfolio income in addition to simply buying life policies.
- retirement planning i.e. the financial need to accumulate wealth to provide replacement income (passive income and portfolio income) in retirement because you are no longer working (either by choice or necessity) and not generating earned income.
- mortgage i.e. the financial need to borrow a capital amount for the purchase of a property, typically an apartment (condo) or house, that will normally be used as your home.
Specific timeline of your personal financial needs
Your financial needs generally change as you get older. A typical timeline of changing financial needs over the course of one’s life would be as follows:
- Age 20- 30: Savings and mortgage,
- Age 30-40: Security and long-term savings
- Age 40-50: Investing and Retirement Planning
- Age 60: Investing
It’s important to note that this is a very general timeline. Personally, I feel retirement planning should be looked at very early in life. With the exception of the current generation of babies (who will actually live shorter lives than those of us in our 20s, 30s and 40s due to the growing obesity problem), people are living longer than ever before. However, at least more people are planning for and providing for their retirement financial needs than ever before. (Why not visit our website and other articles on retirement planning to understand your retirement planning needs.) I have heard it said that people spend 5 times more time planning their holidays than their retirement ! Sad but unfortunately true!
be your own financial advisor
The process of personal financial planning is a process that you can do either on your own or with a financial advisor. The objective of financial planning is to achieve your financial plans and goals through the most efficient management of your available financial resources and the appropriate use of financial products. Unfortunately, most people are not prepared to do financial planning on their own and hence rely heavily on financial advisors and institutions.
a word of warning!! There are a very small number of financial advisors who truly have your best interests at heart (sorry…but it’s true). Many people are just whipping up your financial products for commissions and fees. The only financial advice worth taking is paid for – financial advice and written advice. I’m afraid this is as close to independent financial advice as you’re going to get. By paying at least for the service, you know that the financial advisor is going to provide a service in exchange for payment, rather than the initial and trail commission that some financial institutions line their pockets on financial products sold to you. May or may not be completely. Suitable.
After the recent financial crisis and the expose on the entire financial system, there has never been a more important time than now to get smart and be your own financial advisor. I’m not saying you don’t have a team of financial/tax/legal experts you can consult with. Doing! However, I am saying, become empowered and knowledgeable about your financial needs and the strategies, tools, and techniques needed to achieve them. To become rich and build wealth above just above average, you need to be your own financial advisor, at least to some extent.
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