Financial planning gives direction to financial decisions

© Sergey Nivens – 123RF.com

"In essence, it's an analysis that looks at your current financial situation and assists you in establishing short- and long-term wealth-building goals," says Angela Mhlanga, head of Bancassurance SA at Standard Bank.

"Financial planning provides direction and purpose to your financial decisions; it allows you to understand how each decision affects other areas in your life, for example, buying a particular investment product may help you save for your child's tertiary education. A well-thought-out plan always considers how much time you have to achieve your goals, how to build wealth and capital, and how to best protect your assets and dependents," says Mhlanga.

Reaching your goals

Your plan must combine the many aspects of your financial life, reflect your current goals and also provide guidelines to help you reach those goals. To do this, the following is advised:

• Wealth planning: A wealth plan is an in-depth look at your personal and financial life that will help you identify and prioritise goals and areas of concern, and provide you with the insight and guidance needed to help you achieve those goals, to build your wealth and thereafter to preserve it.
  
• Investment management: This is the professional asset management of various shares, bonds and other assets to meet investment goals for the benefit of the investor. Your investment portfolio should be carefully monitored and regularly reviewed to ensure that you remain on track in achieving your goals.
  
• Trust services: Trusts can help you plan for your future, protect your family, and distribute your wealth according to your wishes when you pass on. Setting up a trust can:

  • give control of inheritance to your heirs at a date when you feel they can handle assets responsibly;
    
  • support a charitable cause on an ongoing basis;
    
  • provide assets for a spouse; and
    
  • offer tax benefits.

• Risk Management: This is the process of identification, analysis and then either acceptance or mitigation of uncertainty in investment decision-making.
  Risk management occurs any time an investor studies and measures the potential for losses in an investment and then takes the appropriate action regarding their goals and risk tolerance.

Financial planner

Though personal finance software, magazines and self-help books offer helpful information, developing a comprehensive and effective financial plan is complicated; so it's critical that you have access to in-depth knowledge. A certified financial planner has the qualifications, tools and experience needed to select the best products for your unique situation and goals, evaluate the level of risk in your investment portfolio, and revise your asset allocation.

"Ideally, your financial plan should be reviewed every year," Mhlanga advises. "The best would be to do a yearly update that considers changing goals and circumstances, and if products in the plan are still suited to those goals and circumstances."

If you think you may be too busy for a yearly evaluation then review your plan every time there is a major lifestyle change such as marriage, birth, divorce or death. Any change in financial positions should also be evaluated.