Taking Charge of Financial Planning Process

Finding good investments, minimizing taxes, beating inflation, and managing money are at the top of many people’s lists. Still, even if you recognize how important financial planning is, you may be waylaid by financial paralysis, unsure of where to begin, or even fearful of making mistakes. Pulling together an entire financial plan can be daunting. Maybe you’ve created a plan that you’re having difficulty following or fear isn’t comprehensive enough. Or you may be confused about what steps to take first.

Here are sequence of steps for taking charge of the financial planning process.
These are the steps:

• Step 1: Determine where you are financially.
• Step 2: Set goals.
• Step 3: Develop a plan.
• Step 4: Keep simple records.
• Step 5: Make an informal budget.
• Step 6: Deal with shortfalls, credit, and debt.
• Step 7: Review your progress.

I will try to elaborate in details in every steps. Hopefully this can give u some ideas about financial planning works. :)

What is will

A Will is a declaration by a testator (the person who make the Will), in prescribed form of the intention of the person making it of the matters which he or she wishes to take effect upon his or her death, until which time it is revocable. In short, it is a person’s last instructions.

Why need to draw up a will

1. Completing your Financial Planning Picture
By writing your Will, you would have completed your financial planning picture because you have covered yourself with insurance and created wealth (business) and accumulated wealth (investment/unit trust). It is a final step how you distribute your estate.

2. Unlock Frozen Assets in a Shorter Period
Most people will have dependants (parents, spouse, children and so on) who may be dependent on money that they provide. It may cause great difficulties for them if the flows of money stop suddenly. It is important, therefore, that instructions are left in the Will so that the money is made accessible to the right people in the quickest period possible.

3. No Limitations
A well-worded comprehensive Will written today will not become invalid should your assets and estate grow in the future. So, your future assets can be protected by your Will.

4. Peace of Mind
If you write your Will, you can enjoy peace of mind in thought because you have made proper arrangements for the distribution of your assets to your beneficiaries, most important, you are still in control of your assets.

5. Cheaper to Write a Will
Will-writing is considered the cheapest among all the financial services. For the one-time fee that is paid, it will last as long as you do not revoke or rewrite it. Even if you decide to rewrite a Will later, the cost is minimal compare with benefits and protection you enjoy.

A person dies WITH a Will	A person dies WITHOUT a Will
You provide for your beneficiaries in the Will you choose rather that letting the law decides.	Your estates will be distributed to the lawful beneficiaries according to the Distribution Act 1958 (as amended in 1997).
Partner, step children, illegitimate children, aged relative or others who depend upon you can be provided for in a Will.	Under the law, there is no provision for these groups of people. They might fall into financial difficulties without your support.
You exercise the right to appoint people of your choice to administer your estates and to carry out your wishes, safeguarding the interest of those you love and care.	The High Court decides for you. It might not be your choice.
No family contention could arise over the choice of administrator.	A family conflict arises on the choice of administrator.
You may appoint guardian of your choice for your infant children. So that their support, health and education will be taken care of.	The High Court decides for you. It might not be your choice.
No sureties are required for Grant of Probate.	Two sureties are required to provide security for the due administration of the estate. The security shall be equivalent to the gross estate. There will be delay in administration.
It costs less in term of legal fees to apply for Grant of Probate than Letter of Administration.	Legal fees could be costly.
With a Will, the whole legal process could be just a couple of months.	The legal process could take years. Assets could have shrunk in value when Letter of Administration is obtained.
Your loved ones are financially protected.	Your family could be facing serious financial difficulties.

Reference: Rockwills Corporation Sdn Bhd

Return and Risk

Knowing Return and Risk
Return and Risk are Primary consideration in Investing. They should likely form the basic for all your investment decision. Thus it is a MUST that you understand what return and risk are and how they are originate and they are related.

Return
You invest to get return. It simply get Gain (positive return) or lost (negative return) on your investment after you have sold it. When you invest, you expect a particular return level . However, the actual return may differ from your expected return. Investing is based on expected return. It is therefore that you do not have unrealistic expectations

Risk
Many think of investment risk as the possibility of losing money. This is a valid concern. Other define risk as the uncertainty of receiving the expected returns. All can these can be measured and quantified by a statistic. Different investment products have different degrees of risk or volatility. Look at the various product like shares, bonds and cash deposit on their annualised return and Risk.They can be classified into two categories:-

(1) Systematic Risk -factors that effect the market in general and it include things like general economic conditions, changes in interest rate or a sudden adverse change in market conditions. And as investor, you cannot avoid these risk

(2) Non-Systematic Risk-factors that are applicable only to the investment itself like quality of a company's management and the sustainability of its product development strategy.You can reduce this risk by spreading your investments over a number of holdings.

Thus, the risk-return trade-off is an important consideration in investment - Higher expected returns have higher risks. Investors not able to take risk have to contend with lower returns. You need to apply the Risk-Return trade off when purchasing the product.
When deciding on the appropriate level of risk, you need to consider two issues. Firstly, what is your tolerance level of risk and secondly, is the length of time you are investing for.

"Don't put all your eggs in one basket", is the basic idea behind Diversification and it is a powerful tool in managing risk. Diversification involves spreading your investments over a variety of assets and securities to avoid excessive exposure to any single source of risk. If you put all your money in a single security, what happen if the insurer goes bankrupt?

To diversify effectively, you must apply the ideas of Correlation, which is a measure of the tendency of a security or investment class to follow that of another. Assets with returns that move in the same direction are positively correlated; if their returns move in opposite directions, they are negatively correlated. Investing in different securities in different asset classes like cash, bonds and shares is a way to go.

When you invest, you operate with a Time horizon in mind. It is the time available to invest to achieve your financial goals. Example, if you are 40 years old and investing for retirement at age 60, then your time horizon is 20 years. Therefore, you can use Time and Return to grow your money or Time and Risk to stomach more risk with time to invest in Riskier assets.

Dollar cost averaging can reduce risk in a long Investment horizon. The idea is to invest a fixed sum of money at a regular interval, regardless of whether the market is rising or falling. If you invest in only a certain time, you may buy when prices are at or near the peak.

Reference: MAA financial Planners SG

What is Investing

Investing is how you make your money grow, or appreciate for long term financial goals. It is a way of saving your money for something further ahead in the future.

Saving is a plan to set aside a certain amount of your earned income over a short period of time in order to be able to accomplish a short term goal. It is a plan of action where you plan on acquiring a certain amount of money by redirecting some of the money you have received from your various sources of income.

Investing, on the other hand, is a much longer term activity. We consider investing as an action that is based on long term goals and is primarily accomplished by having your money make more money for you.

Many people realise the importance of saving but have reservations about investing. Investing is often regarded as "gambling"; "too risky"; "only for the rich";"only for those about to retire"; too complicated"; "not necessary". While misleading, such reservation also deter us from investing. We then forgot the opportunity of growing our savings. If you are in this situation, we will address some of your concerns and questions you may have about investing.

Reference: MAA Financial Planners SG, DFI Kidspace