Seven Steps toward Common Sense Financial Planning

Seven Steps

1. Take control – sit in the driver’s seat and don’t be a passenger taken along for the ride, as one of my clients so poignantly said. Don’t get all worked up by the noise out there, meaning the plethora of news screaming from every corner of our lives, but take the time and concentrate on your life, your goals and how you want to live your life: what do you actually want to achieve professionally, emotionally, spiritually and yes, financially.

2. Don’t be scared – to tackle issues you feel uncomfortable about that is. And arguably many people have this kind of nagging slightly upset stomach feeling when thinking about financial planning. They know they should do something but are not too sure about what that ‘something’ means exactly. It’s not a good feeling so the first choice is to just ignore it. But with many other things in life once you have overcome this resistance you will feel much better about yourself.

3. Start with the basics – keep an eye on the money trail. Where is it all going and what comes in every month. Keep the receipts and write your incomings and outgoings down once a month for at least three, better six months. This will give you a good idea of your spending habits and helps with creating a budget. Sounds too simple? Well, many people just don’t do it.

4. Check the status quo – the four cornerstones of financial planning are protection planning (health-, disability/critical illness-, life cover), pension planning, investment planning for specific goals (setting up a business, college tuition, etc.), and last but not least estate & succession planning. Depending on where you are in your life one area is more prevalent than the other. So where are you in your life right now and what is most important? Have you looked into any of these areas and what do you have already in place? Is this sufficient? What are your assets, what are your liabilities (mortgage, consumer loan, credit card debt)? Do a thorough review at least once a year.

5. Put your family first – are your loved ones cared for in case the unthinkable happens? Talk with your partner, kids, relatives, friends about what they should do if you suddenly were to die and vice versa. Get an emergency plan in place, get organized and, importantly, make a will. You should look for guidance applicable to your personal circumstances (with regards to your nationality, resident/tax status, marital status/int’l marriage). Review whether there is sufficient life insurance on your life and your partner’s life, and enough emergency cash in the bank. Does your partner know where the bank accounts are, what investments and insurance policies are in place and have an overall understanding of what the assets and liabilities are? Are education plans set up for the kids and a retirement plan for your partner? Get help from your financial planner and tax accountant. Having these conversations is difficult and some people avoid them altogether, because they are superstitious. But imagine how difficult it will be for those left behind. So it’s best to address this topic without delay, prepare, then breathe a sigh of relief and enjoy life knowing that your loved ones are cared for.

6. Don’t put your head in the sand – tomorrow will be here sooner than you think. I couldn’t imagine worse than being old and poor (and sick for that matter), truly a sad scenario nobody wants to experience. When we are young we can’t even imagine being old (and how much we still want to enjoy life), then suddenly we are in our late 30’s or early 40’s and realize that we should have started sooner to put some money away for retirement.

Accept the fact that even small amounts saved regularly produce results through the magic of compound interest. And for those skeptics, dollar-cost-averaging actually works, because when stock markets and prices fall you can buy more with the same amount of money. When markets go up again, the value of your investments will jump while you will buy less. Over time you therefore get an average price, and you don’t have to worry about timing the markets. If you are still a skeptic I’d be happy to show you some ‘live’ examples of savings plans that some of my clients started just around the time Lehman Brothers went bust.

7. Diversification is key – everybody knows that they ideally need to eat a variety of foods to stay healthy. The same is true for investing in order to see healthy results. You will have to take into consideration the time frame of your goals, your age/where you are in life, as well as risk attitude and capacity (someone in their late 50’s cannot take as much risk as someone in their late 20’s), and expectations of returns. Not all investment products match all goals, so you will need to be selective. Plus the international and mobile investor should not only keep in mind diversification of assets but also currencies. Discuss the right strategies with your financial planner and touch base regularly to review.

© Stefanie Richert