Personal financial planning is a process
People's lives, the society and economies are so dynamic it is hard to see how financial planning can be an event. Because of the reality of change, it is important to review personal financial plans periodically and make adjustments to reflect current realities.
Individuals make decisions about the size of their families, schooling, savings, investments, marriage and divorce and buying or renting a house, for example. On the other hand, they do not decide on interest rates, government's taxation policy or policies relating to inheritance, the downsizing of businesses and the rate of inflation, for example.
With change all around, it is important to make every personal financial plan relevant to the persons who create them or for whom they are created.
In our Jamaican context, a sliding dollar and its effect on prices has made it necessary to adjust investment portfolios to protect the value of portfolios and present and future living standards. Declining interest rates have challenged the ability of residents who depend on interest income, for example, the retired, to maintain living standards.
Developments in the securities markets, by creating a larger and more varied suite of products, have also provided new options for realising financial goals.
Additionally, efforts by financial institutions, the Financial Services Commission and independent financial educators have also served to raise the awareness of the public and thus provide a basis for re-examining financial solutions.
Although individuals, and groups, are responsible for their savings and investment decisions, these cannot be made in a vacuum. Changes to government policy affecting interest rates and exchange rates, changes to taxation policies, for example, elicit a response from the public for whom these changes have meaning as it affects their current and future lives.
The increased exposure to external financial markets and products and ready access to news of what is happening in those markets have been serving to help individuals get a better understanding of the options available to them.
Government regulations and laws can also function to enhance the usefulness of a personal financial plan. Take, for instance, the Pensions (Superannuation Funds and Retirement Schemes) Act 2004, which has opened a way for the self-employed and employed persons who do not subscribe to current pension arrangements to make structured and organised arrangements for saving for retirement and for getting a pension and, while doing so, enjoy favourable tax treatment for their contributions to these pension arrangements.
When a marriage breaks down, whether or not there is a divorce, serious issues arise particularly if children are a part of the union. Remarriage tends to add another complication to the issues. These matters tend to have a serious effect on family property and the well-being of individuals.
Death often removes an income earner - sometimes a major one - from a family. If there is adequate life insurance, the ability of survivors to maintain their standard of living and pursue and realise goals such as education, may not be seriously compromised. But death can and does cause serious disruptions to the extent that the family can be ruined if it is able to respond appropriately.
Further, sickness and disability, which often present themselves without warning, are capable of removing income earners from a family while increasing expenses.
Although these challenges may be met with an adequate programme, the reality is that their effects may be so severe that whatever was put in place for such eventualities could prove to be insufficient.
Changes in employment status, often by involuntary means and for prolonged periods, can have a catastrophic effect on families. Even disciplined families committed to prudence may encounter serious difficulties when employment income dries up over an extended period. In such circumstances, it may be necessary to make significant changes to the financial plan.
I am not advocating routinely re-visiting each individual's financial plan. Instead, there should be a programme in place to examine periodically the extent to which the plan is relevant to the individual and family.
Significant personal developments or developments in the economy or market place may make it necessary to determine if adjustments should be made.
Failure to undertake this examination and to make necessary changes will surely result in a personal financial plan that has little meaning, use, or relevance.
n Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.