Personal Finance

How can I create a holistic personal finance approach?

financial PLAN

Every financial expert or advisor will tell you that you need a robust financial plan. PHOTO | SHUTTERSTOCK

Every financial expert or advisor will tell you that you need a robust financial plan. Usually, the next logical step would be to have you set certain goals and make a strategic plan to achieve them.

The most basic of these would be to divide your plan into short-term, medium-term, and long-term cohorts to ensure all your financial bases are covered.

These would range from liquidity needs to capital preservation and eventually, to building a sustainable nest egg through longer-term capital gains. This should lead to a good and well-diversified portfolio. As it turns out, they would be on the money.

I will attempt to look at simple but tried and true ways of managing personal finances that, when used in tandem, should get you to your aspirations.

The life cycle approach: Picture your life and the various stages you will have to go through to arrive at your desired financial destination. This is the essence of the lifecycle approach. You will have to go through an asset accumulation phase, where you will be looking to convert your earnings into savings, savings into investments, and investments into sustainable wealth. This is where all your goals are conceived and targeted.

The focus should be on savings and liquidity, think about an emergency fund and/or a money market fund. This is also the phase when you develop a credit relationship, which will allow you more flexibility in your financial future, especially when it comes time to take out a loan or get a mortgage.

It would be a good idea to start working with a financial planner or advisor at this time, so you can make sure you're taking a 360-degree approach to reaching your financial goals.

Read: How to have a financially prosperous 2024

This is also the time to employ investment strategies, such as accumulating wealth in a tax-advantaged retirement account, in this territory there are several options based on your earnings model, from the basic NSSF that is now taking shape in the country to your employers’ pension plans as you go through the various jobs in your career to individual pension plans should you plan to take a sabbatical and do your own thing.

This gives your money more time to grow and multiply, thanks to the time value of money where you can earn interest on your interest and continue to compound your returns. Because younger people have a longer time horizon, this is also when you should be heavily weighted in equities.

Stocks' high-risk, high-return potential is well-suited to young people with plenty of time before retirement to weather any risk that may arise.

The risk management or preservation phase is where you would start the process of diversifying your holdings to preserve your wealth. Choose an asset mix that aligns with your long-term investment strategies. In general, the more risk you are willing to take, the higher the potential for reward.

However, It is important to note that one’s ability to recover from market downturns and corrections incrementally takes a hit as we age, Just as our physical form differs, a 46-year-old may not recover from a market crash the same way as a 25-year-old would.

This is why it is important to make sure you have enough low-risk options to cover your bases for near-term and imperative financial needs. Short-term investment strategies are completely different from long-term investment strategies.

Be sure to discuss both strategies with your financial advisor to make sure you are making the right decisions for each, so you can choose the best investment strategy and make tax-smart decisions to reach your money goals.

In the distribution phase, your goal should be to reduce risk. One way to do this is to draw down equity exposure (remember, equities or stocks offer the potential for high returns at the price of high risk). By lessening your exposure to these riskier options, you can focus your portfolio on assets that might have a lower potential for return but are safer.

This less aggressive approach will pad your investment accounts against risk as your time horizon shortens. It is at this stage that most people are retiring or planning to retire from duty, and thus aligning all your investments including your retirement accounts to the fundamentals of this phase should get you home and dry.

The 3 panel approach: The trick is to balance three areas to achieve financial security and prosperity. These are Protection, Savings, and Growth.

Protection: The aim here is to ensure the protection of the wealth you are accumulating from the various risks that threaten to wipe it out. This would be primarily through insurance. Some of the vital insurance policies that one should consider are, life insurance policies that ideally should be 10-15 times your annual income as per international recommendations, medical insurance to cover you and your dependents should the need arise, domestic package insurance to protect you from the inevitable risks such as loss of mobile phones, and last respect insurance to assist your family in defraying certain costs should you leave this earth.

Savings: Your emergency fund should be 3-6 times the monthly non-discretionary expense. Housing costs should be less than or equal to 30 percent of gross pay. When you combine housing costs and debt payments, it should be less than or equal to 35 percent of gross pay.

Growth: Aim to save at least 10 to 13 percent of gross pay for retirement (including employer match). Have education funds for your children, and spread your holdings across liquid, balanced, and longer-term capital growth asset classes.

The cash flow approach: It is imperative that you have control over every shilling you earn and spend, and you do this by understanding and controlling the movement of your money.

Read: What tricks can I use to save a lot of money this year?

It starts with a thorough assessment of your income sources and expenses, followed by optimisation of your cash flow. This could involve reducing unnecessary expenses or finding ways to boost your income. A carefully crafted budget helps you allocate your income towards necessary expenses, savings, and investment goals.

Building an emergency fund and managing debt are the keys to financial stability. Setting specific financial goals guides your savings and investment strategies. Considering investment opportunities and tax implications helps grow your wealth and maintain tax efficiency. Regular reviews and adjustments ensure your cash flow plan remains aligned with your circumstances and goals.

As you will have seen throughout this article, having a robust retirement account is essential for a good life retirement, however, the key to a top-tier one is to ensure that all your other investments align to a bigger financial plan tailored to getting you what you need when you need it. It is my hope that you will create a financial juggernaut so imposing, that all the obstacles that most certainly will come your way are surmounted with ease.

The writer is a consultant on retirement solutions. He can be reached via [email protected]