What Is Financial Planning

What Is Financial Planning 13
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BensonGibbs,United Kingdom,Professional
Published Date:16-07-2017
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Financial Planning www.thechinfamily.hkAbout The Chin Family The Chin Family is an independent and impartial financial education platform providing free information, resources and programmes. We help people in Hong Kong plan and manage their finances by making financial learning simple and enjoyable. The Chin Family is managed by the Investor Education Centre, which is supported by the Education Bureau and all four financial regulators.Contents What Is Financial Planning? 2 Common misconceptions about financial planning 3 Why do you need a financial plan? 4 The Financial Planning Process 5 Step 1 – Assess your financial situation 6 Step 2 – Create a budget 8 Step 3 – Set your financial goals 11 Step 4 – Know your risk tolerance 17 Step 5 – Work out and implement a basic financial plan 20 Step 6 – Regularly review and adjust your financial plan 28 1What Is Financial Planning? Managing your present and future finances Financial planning is the process of setting, planning, achieving and reviewing your life goals through the proper management of your finances. A holistic financial plan not only involves investing money and building your wealth; but also your credit and tax obligations, everyday spending, planning for a family, setting up your home, saving for your children’s education fund, and saving for retirement – as well as protecting yourself and your family with suitable insurance policies and arranging your estate. All these facets of your financial plan are interconnected. Financial planning is an important life skill to help you plan for your future and take better control of your financial goals by helping you to set realistic plans, evaluate alternatives and take effective measures. Sounds difficult? It does not have to be With the steps outlined in this simple guide, you can start putting together a basic financial plan all by yourself. 2Common misconceptions about financial planning One only needs to start financial planning when approaching retirement. Misunderstanding Financial planning is a life-long process. The earlier you start, the sooner you can enjoy the benefits – and the more time you have to 1 grow your savings. Financial planning is just another name for investing. Misunderstanding Financial planning is more than just investment. Rather, it is about the big picture: bringing together all aspects of personal finance to achieve your financial goals. 2 Once you finish your financial plan, you do not have to think about it again. Misunderstanding Financial planning is not a one-time deal You should revisit and review your financial plan regularly to make sure you are on the right track towards achieving your goals. 3 You need a lot of money to do financial planning. Misunderstanding Everyone can benefit from financial planning, not just multi-millionaires No matter how much income or savings you have, you can always benefit from having a clear plan for your finances. 4 3Why do you need a financial plan? Financial planning is important because it gives you a plan to achieve your financial goals in different life stages. A prudent plan can help you: Satisfy today’s financial needs by monitoring your savings and expenses. Save for emergencies b y A Meet future providing a financial goals by Prudent financial cushion helping you to plot to deal with Plan... your course such as unexpected crises. buying a house and getting married. Plan for your Provide protection for retirement by you and your family amassing enough by having the right wealth to meet your insurance in place if future expenses. something goes wrong. 4The Financial Planning Process Key steps to draw up a basic financial plan 1. Assess your 2. financial situation Create a budget 6. Regularly review and adjust your 3. financial Set your plan financial goals 5. Work out and 4. implement a basic Know your financial plan risk tolerance 5STEP 1 Assess your financial situation A good first step when developing your financial plan is to assess your financial situation. With a clear understanding of your current financial situation, you can decide where you should start from, and what you need to achieve your financial goals. 6Knowing your net worth is important to assessing your financial situation. Start by making a list of all your assets as well as your liabilities. Net worth is broadly calculated as your assets minus your liabilities. Assets are what you own, including savings, property, investments; and liabilities are what you owe, such as mortgage loans, tax bills and outstanding debts. eg savings, property, Net worth investments Assets Liabilities eg mortgage loans, tax bills, Net worth outstanding debts Assets Liabilities Net worth Assets Liabilities 7STEP 2 Create a budget Track the ins and outs of your money to understand your money habits and take control of your spending and savings. Prioritise your needs and wants and look for any unnecessary expenses you can cut to save money. Also refrain from overspending especially impulse buying by credit card. Before you decide to borrow money, make sure you can afford new debt repayments on top of your current expenses or commitments. Budget Planner The Budget Planner can help you record all of your incomings and outgoings, and give you a breakdown of where your spending goes each week, month or year across the following broad categories: household, transport, food and drinks, leisure, shopping, health and beauty, education and profession, family and friends, taxation, financial commitments, etc. You can save your budget planner results on your computer, print it out for later reference or work offline by downloading the budgeting spreadsheet onto your computer. You can access the Budget Planner at: Tools & Calculators www.thechinfamily.hk        Resources 8What’s your budget? Use this worksheet to work out your own budget: Income Savings and investments Salary HKD Savings/Investments HKD Spouse’s salary HKD Retirement schemes HKD Other income HKD  Subtotal: HKD Subtotal: HKD Expenses Lifestyle/Leisure Household  Movies HKD  Rent/Mortgage HKD  Music HKD  Management fee HKD  Utilities  Interest class/Hobbies HKD  (water, electricity, gas) HKD  Others HKD  Internet/Telephone/ Shopping HKD  Mobile phone service HKD Health and beauty  Pay TV HKD  Medical/Dental care HKD  Others HKD  Health supplements HKD Transport HKD  Fitness and beauty HKD Food and drinks HKD  Cosmetics and    Grocery shopping HKD  skincare HKD  Eating out HKD  Others HKD  Others HKD Education and profession HKD Family and friends HKD  Support for parents Planning for ageing HKD  and relatives HKD Financial and legal advice HKD  Children HKD Miscellaneous HKD  Others HKD Others HKD Financial commitments Others HKD  Insurance HKD Others HKD  Loan repayment HKD Taxation HKD  Charity donations HKD  Subtotal: HKD  Others HKD Income – Savings – Expenses HKD You can save up for your annual tax bill by estimating your taxes for the year, then divide that figure by 12 to calculate how much to set aside every month. 9Life events and you Starting work Starting your first job can be one of life’s most exciting times. While you are enjoying the freedom of financial independence, it is crucial to develop good money management skills to keep you on solid financial footing. Financial priorities If you have unpaid student loans or other debts, make it a first priority to clear the debts the soonest possible. Next on the list should be building up your savings into an emergency fund which serves as a safety net against life’s many uncertainties. Watch your spending and use your income to start building your savings. Be sure to maintain a good credit rating, review your insurance needs and get started with long-term financial planning. Keys to managing personal finances • Create a budget to track your finances. • Make it a habit to save part of your income every month. The earlier you start saving, the better chance you have to realise your financial goals. • Set aside money for paying tax. • Maintain a good credit rating by making your loan and debt payments on time. • Review insurance coverage to ensure it meets your needs – medical and life insurance are good choices to start with. • Set some long-term goals for different stages in life. And it is never too early to start planning for your retirement 10STEP 3 Set your financial goals Based on a sound understanding of your financial situation, you may be able to identify your short-, medium- and long-term financial goals. This will help you review your budget, determine your investment time frame and work out a strategy for deciding on the appropriate investments. With measurable and clearly defined goals, it will be easier to monitor the progress. Savings Goal Calculator Saving up for something special? Getting married? Buying a home? Furthering your education? The Savings Goal Calculator can help you work out how you can achieve your savings goals. It will help you calculate how much you will need to save regularly to reach your goal in time; how much you will have if you put aside a fixed amount of money regularly; and how long it will take to achieve your savings target. You can access the Savings Goal Calculator at: Tools & www.thechinfamily.hk        Calculators Resources 11100 100 100 100 100 100 100 100 100 When setting your financial goals, you have to consider: It is important to know what you are planning for. Make a list of all your needs and goals. Remember, managing your day-to-day expenses should come first. The key thing is to set realistic goals and prioritise. For example, if you have borrowed money at a high interest rate (eg credit card advances or other personal loans), make paying off that debt your first priority before taking on other goals. You also need to map out the cost of each goal and how much time you have to save or invest before you need to pay for it (eg investment time horizon). When setting your financial goals, it is important to be realistic. As you regularly review and refine your financial plan and assess your risk tolerance level, you may find it worthwhile to adjust your goals accordingly. What are your financial goals? In the next few years, I want to… Set aside Buy a car Further my emergency funds education Buy a home Get married In the long run, I want to… Set up an education Start my own Pay off my fund for my children business mortgage Build a nest egg Provide enough funds for my for retirement family after my death 12Saving – the earlier the better The earlier you start saving, the sooner you will allow yourself to benefit from the effect of compounding, a powerful mechanism that puts time to work on your savings. When you save or invest in something that pays interest, you earn interest on your principal (the original investment amount). If you continue to save and earn interest, you will receive interest on the principal plus the interest you earned last time, ie earning interest on your interest. This is called compound interest, and it can significantly boost your savings over time. Case study How compounding works over time Stephen has started his first job. He decided to keep a separate savings account from his regular transaction account to make it easier to save. He deposits HKD1,000 into the savings account every month at an annual interest rate of 2.5%, compounded monthly. After working for 20 years, Stephen has accumulated HKD310,975 with some HKD70,000 being the interest earnings. Most of his wealth gains in later years are due to the powerful effect of compounding. HKD 350,000 Interest 300,000 earnings from 250,000 compounding 200,000 150,000 100,000 50,000 0 Year 1 Year 10 Year 20 13100 Do you need a financial adviser? 100 Choosing whether or not to use a professional financial planner depends on your particular circumstances. If you have the time and interest to conduct your own research – and a reasonable understanding of financial markets and products – you may choose to manage your finances on your own. If you have complicated financial affairs, or you have a significant financial decision or plan to make, you may choose to work with 100 a financial adviser. What to look for Make sure to check the following when you consider a financial adviser or planner: • They must know your personal circumstances including your investment objectives, investment horizon, knowledge and experience (including any knowledge of derivatives), financial situation and risk tolerance (including risk of loss of capital), and carefully evaluate your risk profile before making any strategies or financial product recommendations to you. • They should give you proper explanations of why recommended products are suitable for you and the nature and extent of risks the investment products bear. They should also document and provide you with a copy of the rationale underlying the investment recommendations made to you. • In providing services involving derivative products, they must assure that you understand the nature and risks of recommended products and that you have sufficient net worth to be able to assume the risks and bear the potential losses of trading in the products. 1410 questions to ask your financial adviser When selecting a financial adviser or planner, there are 10 basic questions you should ask to assess his/her suitability for helping you to plan your finances: Q1 What experience does the planner have? Q2 What are the planner’s qualifications? Q3 What services does the planner offer? Q4 What is the planner’s approach to financial planning? Q5 Will the planner be the only person working with you? Q6 In what way will the planner be remunerated? Q7 How much does the planner typically charge? Q8 Could the planner’s recommendation unduly benefit any third parties? Q9 Has the planner ever been publicly disciplined for any unlawful or unethical actions in his/her professional career? Q10 Is the agreement put in writing? 15Life events and you Getting married Planning your wedding and the start of a new life with your partner is a thrilling time. One of the keys to a successful marriage is preparing your and your partner’s financial life together, and keeping money issues from putting a strain on the relationship. Financial priorities With financial problems a contributing factor to divorces, it is important to first understand each other’s financial histories and goals (including unsettled debt), then discuss and plan finances together. There is no best approach so make sure you talk through the differences and work out a common approach that both of you accept. Keys to planning your finances together • Talk about your experiences with money, savings and credit; and ask your partner about the expectations on marital finances and financial planning. • Draw up a budget jointly to understand money management habits and discuss how to improve your family finances. • Review and update your financial documents including insurance coverage so that your loved ones will have better protection if something unexpected happens. • Wedding costs can be significant, so talk with your partner about the kind of wedding you want and how you are going to pay for it. Make a budget and agree on which parts of the wedding are the most important. 16STEP 4 Know your risk tolerance An important part of your financial planning is to evaluate your tolerance for risks. Risk is the potential threat that may impact the expected outcome of your investments. Investments that deliver potentially higher returns are usually accompanied by higher risks. Are you willing to accept potential losses in exchange for greater potential gains? Risk tolerance can be classified into five categories. Which one best describes you? Conservative Not willing to take up risk and see loss in investment and may rather forgo potential gains. Moderately May be willing to accept a limited amount of risks to cautious improve their long-term investment returns, but still try to avoid large short-term fluctuations. Balanced Weighting the risks and returns, balanced investors recognise that taking on a measured amount of risks will improve the probability of achieving their long- term financial goals. Moderately By taking on greater investment risks, moderately aggressive aggressive investors expect to see their investment portfolio outperform the market; and do not mind accepting a bit more risk or loss than the market bears. Aggressive Ready to take on higher levels of risks in order to substantially outperform the markets. 17Understand investment risks Market risk, also known as systematic risk, Market risk usually refers to that type of risk associated to a specific market. It stems from the economic, geographical, political, social or other factors of that market. Shifts in interest rates affect a wide range of Interest investments – including bank deposits, stocks, rate risk bonds and property. A company in which you invest may suffer a Business risk severe decline in profits or even go bankrupt. A company you invest in may conduct a Corporate corporate transaction that you deem misgovernance detrimental to shareholders’ interests. Overseas investments can be badly hit if Currency risk currencies suddenly turn against you. Increases in the price level can eat away the Inflation risk value of your capital and reduce your purchasing power. Tying up investments in products which are Liquidity risk hard to liquidate, or carry heavy costs for liquidation, can prove a burden. Changes in government policies and Policy risk regulations could have profound impact on your investments. The best way to keep away from investment Scams risk scams is by using common sense and taking precautions. Avoid get-rich-quick schemes. If your broker defaults or goes bankrupt, you Broker failure may find your investments at risk. It is best to deal with authorised and licensed brokers. 18

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