Personal Financial Planning
Everybody wishes to have a bright future. While some people might not feel like having families, I intend to have a happy family when the time comes. However, with family comes responsibility, all of which will only be satisfied if I secure my financial situation for the future is now (Billingsley, Gitman, & Joehnk, 2016). This paper uses economic tools to demonstrate my current financial situation. It also illustrates my desired future, which is independent of my current position and will undoubtedly change with time. While making this financial plan, I will need to consider several assumptions that occur in the market and economic conditions. These assumptions will affect the types of choices I make and the course of action I will take to achieve my desired goals.
Personal Financial Situation
Assessing my current financial situation requires an analysis of all my assets and debts, as well as a listing of all my expenses and incomes. By so doing, I will be in a position to understand whether or not I can expect a budget deficit or surplus. More importantly, an analysis of my financial situation will help me to assess how realistic my goals as well as help me to monitor my progress towards achieving them. All minor assessments of my current position are included since they will provide relevant information.
Currently, my assets total to about $800000, with total liabilities adding up to an estimated $250000. On the other hand, I have a net worth of about approximately $700000. I intend to achieve my educational goals by saving $800 monthly. My working assets have $550000, which adds $30000 annually. Other intentions include marrying, and this will cost me approximately $50000, having my dream house at the cost of $70000. My asset allocations include $600000 long-term care assets, which are at risk and need a shortage in my net life insurance estimated at $300000.
However, I am afraid that before the last age of retirement, money may run short. At this point, I have to consider some of the possible alternatives that would assist in improving my financial situation. These options include: Increasing my monthly savings by $200 monthly, increasing the return rates on my assets, and reducing my debts. I would also extend the period of my retirement by five years so that I will retire at 65 years. I may yet have to combine some of the mentioned options while reducing the expenses incurred on them.
Banking services
Personal income- Personal financial planning should always focus on an individual’s income in detail. When deriving an own financial plan, I should consider the fact that the business plan significantly relies on the income-generating sources for that specific individual. This factor should also account for the possibility of an individual having several sources of income. In most cases, the origins of income for individuals may include bonuses from their investments, salaries from employment, or even the wages received from an employer. This assessment is crucial since, to achieve my goals, I will have to fund my objectives. Therefore all possible sources of income should be accounted for, including sources like dividends. More sources of income translate to a clearer path towards effective planning and budgeting (Billingsley, Gitman & Joehnk, (2016). Accurate budgeting and planning mean that I will have money to spend on paying insurance and do banking services as well as other expenses.
Dividends- The amount of money acquired from shares. When members of a company buy stocks, they are given their returns when the company makes a profit at the end of a financial period. Therefore, this might as well be part of an individual’s income since the amount accumulated from dividends could be used in other investments.
Wages and Salaries- Wages account for the money paid after an individual has completed a task. On the other hand, salaries are paid while an individual is working in the company. While wages are paid monthly or yearly, payments are paid either on an hourly basis or according to the agreement made between the employee and the employer (Billingsley, Gitman, & Joehnk, 2016). In both cases, an individual could use these payments for other income-generating projects, protection, or other expenses.
Pension- When an individual has rightfully resigned his duties from work, they are entitled to a certain amount of pay known as a pension. However, this only depends on the terms and conditions of employment. Similarly, this money could also be used for investment, expenditure, or protection purposes.
Housing decision- The decision on whether to rent or buy a house is never an easy one since it relies on not only the financial capabilities of an individual but also the personal circumstances and lifestyle choices (Mahapatra & Mishra, 2020). From a financial standpoint, I would have to consider the payoff and cost of each option. As long as I rent a property, the costs incurred will be recurring every month. These costs will include rent and rental insurance expenses. However, I could get a tenant’s insurance cover that caters for any liability that I could cause to the building and the other tenants as well as my possessions.
On the other hand, owning a house will lift me off from the burden of paying the rent and the insurance monthly. However, building a house from scratch is often not that easy. I would have to cater for all the expenses involved, but in the end, I will have the kind of lifestyle I desire.
Financial Goals
According to the smart model, goals opt to be specific, measurable, attainable, realistic, and timely (Guzman, Paswan & Tripathy, 2019). Also, goals are categorized as short-term, intermediate, or long term goals. In my case, working out my financial plan would require me to categorize my goals in these three categories and ensure that they follow the smart criterion. Therefore, I would say that my short term goals would be to clear off my debts and reduce some liabilities as well as achieve my education goals. My intermediate goals would include getting a wife in five years and building a house in six years. In the long term goals, I would like to retire at 65 years with a pension of $30000. To achieve my educational goals, I would have to save $800 monthly, and having a house would require a budget of around $70000 while marrying would need about $50000. I have a car loan, which I pay $ 3500 monthly and an educational loan, which I pay $50000 monthly.
My income would be utilized in meeting my goals. It is, therefore, essential that I understand where this income will be generated from and how it would assist in fulfilling these goals. However, after assessing my current situation, I know how this income will be created and how it would help me to achieve my goals.
Financial Plan
To obtain my surplus, I would have to deduct all the expenses from the total income. The remaining amount, including that after deducting the savings, will be treated as a budget surplus. Financial planning could be done using financial planning software known as intuit mint. The amount of surplus remaining would be enough for me to start accumulating more assets. However, to achieve most of my goals, both intermediate and long term, I would have to combine some of the approaches to increasing surplus. At the same time, I would have to minimize liabilities. Increasing the age of retirement by five years will also buy me more time to generate more income. At the end of my retirement year, I think I will have accumulated a considerable amount of assets. Although it might not seem enough for my family and me to some extent, it might just serve as right owing to the idea that my wife will be working by then. I am also assuming that maybe some of my children would be off school by the time I graduate. This means that I would have minimized most of the liabilities I would be having at that time, thus allowing me to cope well with the accumulated assets at that time.
Most of my intermediate goals would be achieved with relative ease when I shall have cleared paying my current debts like paying off the car loan would allow me to upgrade on to a better automobile. Also, settling for the education loan would mean an additional $50000. Clearing off my debts as part of my short-term goals would help me achieve my long-term goals, which are dependent on my ability to accumulate productive assets. Accumulating these assets would then allow me to comfortably quit my job and focus on my family while living on the income generated upon my retirement. Currently, I am working towards reducing debts, which must be done before working towards realizing my intermediate and long-term goals. Unless I reduce my current liabilities, which would then reduce my expenses and ultimately increasing my income, I will not be able to achieve my intermediate goals. Consequently, I will not manage to work on my long-term goals, either.
Assessing my current financial situation will be beneficial in assisting me in realizing the possibility of accumulating assets until I can reduce some expenses such as reduction of debts (Guzman, Paswan & Tripathy, 2019). These debts would also include the completion of my education loan payments. Since I am currently working on reducing my debts, and as I will continue to do so, my financial situation will eventually transform. With my financial situation being different, I would now have to make different choices.
I was able to learn about my financial situation by analyzing my income and expenses, as well as my debts and assets. Having seen my financial situation, I have learned that even minor financial information can be useful in making effective financial plans since it can be effective in bridging the gaps that can prevent one from achieving their goals.
Individual Factors that may influence financial planning
Over the past few months, ever since I started to think about financial planning, I realized that the circumstances in my life influence my economic thinking. These circumstances change the choice of what I need and want. They also affect the level which I am willing to go to achieve my goals. However, these characteristics are dependent on the type of life I desire to leave with my family, and when I retire. Even though everyone is different, some circumstances are familiar to everyone. These common characteristics affect our financial plans since they influence hour financial concerns. Factors such as age, health, and family structure affect our financial matters.
Age: My desires, priorities, and needs with varying stages of my life. Typically, the process of the planning process changes with change in time as an individual gets older (Plan, 2016). Even though I might be different from other people, some financial concerns would remain the same throughout the various developmental stages during adulthood. Due to these changes, I am expected to analyze life stages if I wish to execute a proper financial plan.
Currently, I am at the beginning of my adulthood, and luckily, I have no dependents. However, I still have little accumulated assets and short wealth. Since I am only a young adult is also apparent that I have low expenses to cater to since I have no dependents. This freedom to make individualized choices directed only to myself means that I am in a position to make high-risk decisions. I would also admit that at this point in my life, I am only focusing on increasing my income and developing my career. Additionally, all the investments I currently have as well as the ones I am planning to initiate, are geared towards personal growth.
As I progress with my career, my expenses will continuously increase as my income increases, so my lifestyle expectations. Maybe by then, I would be having a wife and my parents too to take care. The total responsibilities to take care will not be the same as they are now. The situation might still be favorable since I will have increased my asset accumulation, probably, having my own house, an inheritance, and I would have opened my retirement account.
The ability to assume risks will become more abundant as asset base, expenses, and income increase (Plan, 2016). However, the urge to take risks will be declining at the same rate. At this point in my life, I would need to protect my accumulated assets and the people depending on me. As time moves, the reality that I will be getting older will increasingly become clearer and thus the need for more protection. The need for security will increasingly become bigger with increasing age since sickness will become common, and one day I will have to stop working. In this case, I would need to establish new sources of income.
Health: My financial plan will be affected by my health since health affects an individual’s tolerance to risks as well as expected income needs (Plan, 2016). While making a financial plan, I need to consider some insurance against long-term disabilities, chronic diseases, accidents, pregnancy, and birth. In case, I may acquire certain health conditions that may extensively affect my productivity at work or reduce my earnings while increasing my expenses. I might need to have more income-generating sources. Frequent sickness is often accompanied by reduced tolerance to risks and increased costs of treatment, which would then need protection. This protection often compromises one’s financial choices.
Family structure: Having a wife, children, and parents depending on me would affect the decisions I make relative to family structure. Having dependents mean that I will have other people to cater to and, therefore, I would have to consider them while making a financial plan. With wife, children, and elderly parents, my financial planning will have to include them for the whole of their lives. I would have to cater for the children’s financial needs and assumingly strive to give them experience better than the one I lived. Since the decisions that I will be making will not affect a single person, the willingness to take risks reduces while income needs will increase.
Evaluating Alternatives and Making Choices
Identifying the possible ways of manipulating your plans from one option to the next is a way of identifying strategies that can suit your intermediate and long-term goals (Plan, 2016). Understanding how to make choices requires an imaginative and realistic idea of assessing the future consequences that your current opportunities may have. The value of the options that we make is dependent on one’s lifestyle choice and well as a variety of environmental factors. Our career choices, family structure health, age, and economic factors affect the types of decisions we make now and the alternatives that may be available.
It is crucial to evaluate every possible alternative. This evaluation should be done in consideration of its benefits and shortcomings too. Additionally, I would have to think of the involved risks, and the position a specific choice would leave me in case I needed to make another choice. The choices I make would need to have numerous alternative and diverse options. Having multiple different options would help to understand the effects that individual decisions made will have on the intermediate and long-term goals. If I could have various options, I would have a bigger chance to think and plan effectively.
Conclusion
In my current situation, I am reducing my debts. Therefore, one option would be to proceed. On the other hand, I could opt to start accumulating my assets as soon as possible. This choice would mean collecting a considerable amount of assets and after looking at my expenses, reducing the cost of expenditures would not be a viable option. Since reducing income would not be a viable option, the other alternative would be to increase profit. So after looking at some of the available options, I think the best option that would favor my short-term, intermediate, and long-term goals would be to clear all my current debts. In case I manage to clear debts, I would have other choices to make. For instance, after removing the car loan, I could choose to add some money to the monthly payment and buy a better car, or I could want to invest the funds elsewhere, thus increase my income. When I complete paying back my student loan, there would be an option of spending the money in other activities. Another choice would be to include it in my monthly savings. Either way, the choices I would make after clearing my debts should focus on generating more income for a better future with my family.
References
Billingsley, R., Gitman, L. J., & Joehnk, M. D. (2016). Personal financial planning. Cengage Learning.
Guzman, F., Paswan, A., & Tripathy, N. (2019). Consumer-centric antecedents to personal financial planning. Journal of Consumer Marketing.
Mahapatra, M. S., & Mishra, R. K. (2020). Role of Self-control and Money Attitude in Personal Financial Planning. The Indian Economic Journal, 0019466220933408.
Plan, S. C. (2016). Personal Financial Planning.