Making a financial plan
I am a young lady, 23, just entering the world of work - approximately one year, but I have not been successful in my finances. I plan to be, but my execution is faulty to say the least. Anyway, I am interested in purchasing on the Jamaica Stock Exchange and I was wondering if you would advise me on how to go about achieving my saving goals as well as making financial plans for the future.
Your savings goals and investment programme are important elements of your financial plan. It is encouraging that you are focused on getting these in place at a young age as this will make it less stressful to achieve your goals.
You will need to determine what you want to achieve initially although it is quite likely that you may need to make changes as time and circumstances change. First, decide what you want to achieve in the short term, five years or so. Next, decide on your medium-term goals and then your long-term goals, more than 10 years.
Decide which goals are the most important for each phase and ensure that they are well-aligned. In other words, avoid situations in which efforts to achieve one goal will frustrate the effort or plans to achieve others. In particular, avoid situations in which there is confusion over which goal is to be funded with the available resources or which is to be achieved first.
People differ in the priorities they set so what is a long-term goal for some persons could be a short-term or medium-term goal for others. I have observed that some young people, for example, are focused on purchasing their own home in the short to medium term. The priorities you set will inevitably influence the strategies you employ.
Whatever your priorities are, you will need to determine each goal and when you want to achieve it, but you must have some idea about what it will cost so that you will know how much you need to save and the kind of savings and investment returns that are required to realise your goals. Beyond that, you will need to keep abreast of how inflation affects the cost and make the required changes to your savings and investment programmes.
The approach you take will also be influenced by your capacity to take risks. If you are not wired to take risks or do not have the experience or resources to do so, you should recognise that it may take longer to accumulate the resources required to fulfill your plan.
Ultimately, you will want to increase your wealth as measured by your net worth - the difference between your assets and your liabilities so you will aim to grow your investment assets to drive the growth of your net worth. To do so, you should restrict your consumption and this can be better achieved if you make and use a budget in which savings are a priority.
You can generate savings by entering into an arrangement with your employer to deduct and send to a financial institution a set portion of your salary each pay period, then discipline yourself not to encroach on it at all. It is easier to achieve this if you set up an emergency fund to cover unanticipated expenses. These expenses should not come up habitually.
Savings and deposit rates are not very attractive, so you may wish to make use of unit trusts and mutual funds - of which there is a wide variety - and the stock market but I suggest that you exercise caution. The stock market can give you very good returns, and very bad ones, too, so you must prepare adequately for it by doing research, learning how it works and having funds that you will not need in the short term and which you can afford to lose a portion of.
Depending on your goal, you may need to borrow, but it is best to do so for assets that will have long-term value to you or that can assist you to increase your net worth. Home purchase, education and major personal assets are the best candidates.
Your plan should not only include acquiring assets. It should include strategies to contain debt and to use it wisely when it is employed. Apart from cash management and investments, include a plan for risk management, and insurance in particular, and develop strategies to spread your risks. Have a plan to make the fullest use of all legitimate means to minimise your taxes. Create an estate plan for the smooth and cost-effective transfer of your assets at your demise even if you are convinced that you will live forever. Include a retirement plan, too. The earlier you start planning, the better in the long run.
Creating a financial plan is not as intimidating as it appears, and help is available. Different elements will assume great importance at different times, so be clear about where you want your primary focus to be at a particular time. The key to success is a disciplined savings plan.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free personal financial advice and counsel. Email firstname.lastname@example.org