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Financial Planning and Management |
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- It is a process that involves managing money from sources of income into savings, expenses, protection and investment.
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| Five steps in financial management process |
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- Setting goals
- Evaluating financial status
- Creating financial plan
- Carrying out financial plan
- Reviewing and revising the progress
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| 1. Setting goals |
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- It is a first step in the financial management process.
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- The financial goals must be prioritised and specific
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Short-term financial goals |
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- It can be achieved in less than a year. Short term financial goals do not involve a large amount of money for example: purchasing a laptop, furniture, a cell phone and others.
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Long-term financial goals |
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It usually takes more than five years to achieve.
Long term financial goals involve a large amount of money for exmple: children's education, medical expenses and others
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SMART financial goals |
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Financial goals set based on the SMART concept our spending in order to achieve the desired financial goals |
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\(\begin{aligned} &\space S- \text{Specific} \\\\& M- \text{Measurable} \\\\& A- \text{Affordable} \\\\& R- \text{Reliable} \\\\& T- \text{Time-bound} \end{aligned}\) |
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| 2. Evaluating financial status |
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- Assets and liabilities are the benchmarks for evaluating our financial status
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- Evaluating our financial status helps us measure our performance in the effort of achieving our short-term and long-term financial goals.
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| 3. Creating financial plan |
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| Steps to consider before creating a financial plan |
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- Define the short term and long term goals
- Make an initial budget to achieve each goal
- Calculate monthly savings needed to achieve the short-term and long-term goals
- Analyse spending behavior
- Set a time frame to achieve each goal
- Determine income strategies that will help to achieve the financial goals.
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| 4. Carrying out financial plan |
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- It turns the financial planning into action that can be implemented
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- When carrying out a financial plan, we must follow the plan at an early stage.
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- We must ready to change and compare the planned monthly expenses and actual expenses.
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| 5. Reviewing and revising the progress |
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- Reviewing and revising the progress of a financial plan from time to time is important to make sure the cash flow is always positive.
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- This indirectly helps us to achieve our financial goals as planned.
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| Evaluation the feasibility of the short-term goals and long-term financial goals |
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- An effective financial plan should be get aside \(10 \%\) savings of the total income prior to engaging any fixed and variable expenses.
- If there is a negative cash flow, we should adjust the financial plan by reducing the variable expenses.
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