Financial Planning

Every individual is expected to go through some basic life cycles. Though some do not go through it but a majority do. It starts from birth to death. A picture of this Human Life Cycle is shown in picture:

Each stage comes with its own needs. At the Foundation Stage, you need to provide for your Child’s education, feeding, shelter, health e.t.c. Unfortunately, many people do not consider this but live by the day. This is the reason why you see a lot of parents under so much pressure anytime the children are due to go back to school. Some die of high blood pressure from stress related to looking for money to make ends meet.

When the child comes of age and starts working, they start to provision for their life and needs. This is the Life planning stage where you think of marriage, career, wealth creation e.t.c.

After this stage, you grow to retirement and towards the grave. The priority at this stage is no longer life planning but Succession Planning. How to bequeath your wealth to your children, grandchildren e.t.c. who will take over from you in the family business and your major need at this stage will be your health as you need more money to maintain your health at old age.

Financial Planning is the solution to these challenges. I will state categorically that i am addressing parents that have a means of livelihood not those that depend on other people to pay their bills. I am writing to the workers or business people that earn a living.

What is Financial Planning?

Financial Planning is a continuous  process of taking necessary financial decisions that will help you achieve your objectives in life. It focuses on meeting a need in the future.

It can also be defined as a process of meeting your life’s goals through proper management of your finances.

Proper Financial Planning protects the individual, his or her dependents and ensures financial freedom. It brings about harmony and takes away stress.

Words to note: continuous process; necessary financial decisions; management; future; objectives/goals.

Your financial Plan targets to meet a need in the future. It prepares for tomorrow so that when the need arises, you would be fully ready to meet it. It is dynamic (continuous process) hence you must review it with changing circumstances and make sure that it will still achieve the set goals. You need to manage your finances in order of priority to meet the most important needs first. It requires focus and total commitment. Your goals are important to you so you must carefully decide on how to apportion your money to each area. It cannot be achieved in a day. It demands professional attention as your circumstances evolve. Every successful person works with a professional financial adviser to ensure that they maintain the appropriate structure to meet their goals.

Exercise 1

Review the picture above and identify the Life Cycle stage you are at now. What needs do you have to meet at this stage? Are you able to meet those needs? Take a step further and write out your life’s goals/objectives clearly.

Two broad categories of Needs and The Reality of Life

Before you can plan your finances, you need to identify the things you are planning for. The stages of Human Life Cycle shows us the basic needs at each step of our life. Having done that exercise on identification of your stage in the Life Cycle and the needs, we will consider the two broad categorisation of needs in Financial Planning. They are:

 

• Protection Needs

• Investment Needs

 

Interestingly, most people talk about wealth creation first and with all due respect to the ‘marketers’ that sell that concept to people, it is a wrong place to start. It is like wearing a Doctor’s robe and carrying out an operation without going through the medical school successfully. It does not matter your level of wealth (you can ask the very wealthy ones),if you do not protect yourself and your dependents, one mistake can wipe out all that you have accumulated and still leave you in serious debt.

The Reality of Life

Though we often spiritualize it or deny it, the reality of life is that one day, as the breadwinner, you will be taken out of the life of your dependents. The fact remains that most people do not know when that will happen. A lot of people think that we refer to death alone when we talk about this. The truth is that if the breadwinner is taken out of the family through death, he or she is in a better position than the ones that are removed from that through disability.

Example: Mike is a young successful Manager that set up his own business at the age of 30. He is happily married with three children aged 5, 3 and 1. He lives in Lekki phase one (a rented duplex). His children go to Corona School and his wife is a housewife. Mike asked her to stop working since his income could take very good care of them. He has over N80m in his fixed deposit with XY Bank. One day, Mike went for a presentation at TY Oil & Gas and on his way out of the building slipped and fell on his back. He was rushed to the hospital and after due checks the doctor confirmed that his spinal cord was affected. The family planned and flew him abroad for further treatment but unfortunately, Mike could not be restored. He was confined to a wheelchair for the rest of his life and has partial paralysis on his right arm and leg. Unfortunately, Mike did not take up any form of Insurance on himself. He did not anticipate that such fate will befall him. What do you think will happen to Mike and his family? Will the children move from Corona to a Model School (Public School)?, will his wife quickly go back to work to earn a living to take care of them?, will they relocate from Lekki Phase 1 (upper class) to Ajegunle (lower class)? How will Mike feel looking at all these?

In Africa especially, we are responsible for our Spouses, Children, Parents and other relations. The list goes on for the very successful people. The question i asked earlier which i will repeat again is: What will be the fate of your dependents if you were taken out of their lives or you become unable to provide for them again? Is it possible for you to put in place structures to protect them in case you are incapacitated or dead? What about you? If you lose your means of livelihood or income now, how long can you manage till you get another source without going below your accustomed level of comfort?

The solution to all these are provided under your protection needs: The main question is who do i protect and what do i do to protect them. Once you become economically active (start earning money), you need to protect yourself. You must protect your income, health, and any debt (loan).

For young married couples, you need to protect yourselves (Life), Incomes, Health and Debts.

For young married couples with children you need to protect all the things listed above as well as your children’s health and education.

You need these protections until the day you retire, children graduate or your die.

You can protect the things listed above in the following ways:

1. Yourself/Spouse– Life Insurance. If you do not have a Life cover, you are exposed. Tied to your Life Insurance must be a disability insurance that will take care of you in case of any disability.
2. Your Health– Health Insurance. Medical Insurance is a smarter way of securing your life at a cheaper rate. As you age, your premium increases hence the earlier you start, the better for you. Again, if you plan ahead, no emergencies will force you not to get best care due to lack of funds.
3. Your Income– Income Protection Insurance. Unfortunately, most insurance companies shy away from this. If you require further advice on this do send me an email to info@speaktochi.com
4. Debt (loan): In the case of any eventuality, your creditors are paid first, if you do not protect the loans you have, your property will be sold to recover your debt thereby throwing your dependents into hardship. Fortunately, no bank will give you an unsecured loan.
5. Your immediate family at death: Most cultures in Nigeria expose the wife and children to wicked relations that will take away all that their husband/father had while he was alive. As the male breadwinner, you must put in place structures that will protect your property from being taken from your family once you die. You must have a WILL or TRUST that will secure your assets.
6. Children’s Education– Term cover Insurance tied to your children’s education supplementation plan. If you start a 15year education plan for your child and you die in the second year of contribution, where will the target sum be realized from to ensure your child’s education? The Term cover ensures that in case of death, the target sum assured is paid to your family and your child can go to school.

Until you are adequately protected, you cannot talk about your investment needs.

Exercise 2: From the list of things you need to protect, how many have you protected adequately? Write out this list and share with me on info@speaktochi.com and i will be glad to review it with you.

Investment Needs

What is an Investment? It is any asset or item purchased with the hope of it generating income in the future or appreciating in value. To make an Investment you need to first of all accumulate some funds for the investment. Savings is on top of your Investment needs.Everyone need what is called an ‘Emergency fund’ readily available all the time. AN Emergency Fund is funds set aside in case of any financial dilemma. It is your lifeline that you fall back on in case you lose your primary source of income. You need a minimum of six to nine months of your monthly expenditure in that fund always. If you spend a minimum of N50,000 monthly, you need at least N300,000 to N450,000 in a liquid form as your Emergency Fund. This can be invested in Fixed Deposits, Treasury Bills or secured investments that can be easily converted to cash in case of an emergency.

Other investment needs include:

• Young single adult – build up for your retirement, house, business, holiday
• Young married couple with children- children’s education, retirement,  house, business, holiday
• Married couple with mature children- retirement

Investment Vehicles

There are numerous investments that you can consider (short-medium to long-term) namely:

• Fixed Income
• Equities
• Real Estate
• Alternative investments
• Luxury goods

For further discussion on these investments do send your request to info@speaktochi.com

Exercise 3: List for me the various types of investments you have and their total value. If you require an independent eye to review your assets and advise you on them do send an email to info@speaktochi.com

Steps to Setup an appropriate Financial Plan

Having gained a good understanding of what Financial Planning is and the various types of needs and Investment vehicles, we will consider the Financial planning process. The steps are:

• Determine where you are currently. IF you did exercise 1, you would have a fair knowledge of where you are. At what stage of the Human Lifecycle are you and what have you put in place to meet the needs as well as future needs? Write it down.
• Write down clearly your financial goals. Where do you want to be in future? What are your life’s goals?
• Align your financial goals with your human life cycle needs. It is ok to desire a lot but it must be in line with your future circumstances. Put the two side by side and create a comprehensive financial goal which encompasses your future needs.
• Write down the various steps to take to achieve your financial goals. You may need the advice of an expert from this point.
• Develop an appropriate structure to meet your needs. You start with a working budget then savings plan, insurance and investment outlets to protect and plan for each lifecycle need. If you are not an expert in this, ensure that you ask an expert to assist you with this.
• Implement the plan. You need discipline to do this. You need to give up things of lesser value now for future benefits. You may give up that holiday, clothes, shoes, party, to save for your house, child’s education e.t.c.
• Review your plan periodically. You cannot do this without the help of an expert unless you are an expert in this field.

Exercise 4: Write your financial Plan and share with me on info@speaktochi.com if you need the assistance of an expert, send me an email

Prudent Financial Planning

As we conclude, I will take you true the necessary areas every individual is expected to provision for in the course of their life depending on the Human Lifecycle. This is what we refer to as prudent Financial Planning. They are:

• Legal last Will (Trust) & Testament
• Adequate Life Cover
• Adequate Medical Cover
• Adequate Provision for Retirement
• Children’s Education Fees- (From Crèche to University)
• Wealth Creation

This is the order for every individual. If you are above 23years and have not started doing anything, you need urgent attention. Send us a message on info@speaktochi.com

What does your financial plan look like.Let me help you put in place the best plan for you. Remember it is personalized. You cannot use another person’s plan because your circumstances differ.