Financial Planning and Management


10.1  Financial Planning and Management
  • It is a process that involves managing money from sources of income into savings, expenses, protection and investment. 
Five steps in financial management process 
  1. Setting goals 
  2. Evaluating financial status 
  3. Creating financial plan 
  4. Carrying out financial plan 
  5. Reviewing and revising the progress
1. Setting goals 
  • It is a first step in the financial management process. 
  • The financial goals must be prioritised and specific 
  Short-term financial goals   
  • 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. 
  Long-term financial goals  

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 

  SMART financial goals   
  Financial goals set based on the SMART concept our spending in order to achieve the desired financial goals   
  \(\begin{aligned} &\space S- \text{Specific} \\\\& M- \text{Measurable} \\\\& A- \text{Affordable} \\\\& R- \text{Reliable} \\\\& T- \text{Time-bound} \end{aligned}\)  
2. Evaluating financial status 
  • Assets and liabilities are the benchmarks for evaluating our financial status
  • Evaluating our financial status helps us measure our performance in the effort of achieving our short-term and long-term financial goals. 
3. Creating financial plan 
Steps to consider before creating a financial plan 
  1. Define the short term and long term goals 
  2. Make an initial budget to achieve each goal 
  3. Calculate monthly savings needed to achieve the short-term and long-term goals 
  4. Analyse spending behavior 
  5. Set a time frame to achieve each goal 
  6. Determine income strategies that will help to achieve the financial goals. 
4. Carrying out financial plan 
  • It turns the financial planning into action that can be implemented 
  • When carrying out a financial plan, we must follow the plan at an early stage. 
  • We must ready to change and compare the planned monthly expenses and actual expenses. 
5. Reviewing and revising the progress
  • Reviewing and revising the progress of a financial plan from time to time is important to make sure the cash flow is always positive. 
  • This indirectly helps us to achieve our financial goals as planned. 
Evaluation the feasibility of the short-term goals and long-term financial goals
  • 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.