The secret to attaining financial independence is Knowing the A to Z of personal financial planning. It requires a thorough understanding of the part of the financial system that relates to personal financial planning. You have to wade through a lot of financial jargon, product information, professionals, financial institutions, and financial investments to attain financial independence.
Your progress will depend on your ability to cut through the noise, and identify which financial solutions will most advance your agenda. Here is a straightforward approach.
Contingency Fund
Your first financial planning priority is your contingency fund. This is your emergency fund. Sometimes life presents us with situations that require substantial sums of money within a very short time. Sudden job losses, house fires, theft of your valuables, accidents, and police bonds are some examples.
To cater for such emergencies, you should keep three to six months of your monthly income within easy access like in a savings account, or in a money market fund. Your financial discipline will determine whether your contingency fund remains untouched to serve this purpose. Any money above your contingency fund requirement should be assigned to proper investments in the financial markets.
Retirement Savings
Your second financial planning priority is saving for your retirement. Retirement planning can help you live longer. Many employed people make provision for their retirement by contributing to their pension plan through their employer.
A pension plan is regular savings and investment plan that is designed to provide income in your retirement. A retirement fund is built by regular contributions during your working years, and upon your retirement, the accumulated savings and interest are gradually paid out to you as regular income for life, or for a certain period. It is wise to save for your retirement regardless of whether it is through your employer’s pension scheme, or your private arrangement.
If you are below 30 years of age, contributing 10 – 15% of your regular income towards your retirement should be adequate. Pension contributions that begin when you are above 30 years of age should begin at 15 – 35% of your regular income. Pension contributions that begin when you are older than 40 years should at least be 35% of your regular income to be sufficient. The earlier you start the better. Being old and broke is a thought you don’t want to entertain.
Life Insurance
Discussing your death is not fun, but a life insurance should be your third financial planning priority. A life insurance cover will provide replacement income for your family in the event of your early demise. The process of procuring life insurance begins by determining the sum assured, which is the cash value that will be paid out to your beneficiaries in the event of your demise.
The recommended sum assured is that amount which is sufficient to clear all your outstanding debts, and provide for your family’s financial needs, at the current living standards, until that time when your youngest dependent is expected to be financially independent.
Your financial adviser can help you to determine your sum assured. Your preferred life insurance company will advise you on the cost of your life insurance cover, and mode of payment. Proceeds of a life insurance cover can also be left behind for older children as an inheritance, and can also help to pay for property taxes upon inheritance.
Life insurance is your answer if you have ever worried about what will happen to your loved ones in case of your early demise.
Health Insurance
Health insurance should be your fourth financial planning priority. It provides insurance cover for inpatient, and outpatient hospital bills that either you, or any of your family members may incur during an illness, or accident hospitalization.
This cover is very important because it protects the assets that you have taken many years to accumulate from adverse medical bills, while ensuring that you have access to quality healthcare. Therefore, it is wise to have health insurance coverage. Many employed people get it through their employer, but it can also be bought through a private arrangement if you are self-employed.
It is also advisable to contribute to your national hospital insurance scheme. Most private health insurance providers will settle your hospital bills less any national hospital insurance rebate.
Personal Accident Insurance
Personal Accident insurance is a good consideration as the fifth financial planning priority. It provides a cash compensation for temporary, permanent, or total disability, or death arising out of an accident, and it can also cover some accident-related medical expenses.
The limit of cover or sum assured can be a multiple of your annual income, or it can be determined by some arbitrary method that makes sense to you. Once your sum assured has been determined, your preferred insurance company should advise you on your annual premium.
The cost of one, or two weekend outings can buy a reasonable amount of personal accident insurance. This insurance cover is important because an accident can render you, or any member of your family incapable of engaging in your usual occupation, or any other economic activity. It is therefore wise to have some personal accident insurance for yourself, and your family. Many employed people get this coverage through their employer, but self-employed people can also make private arrangements for one.
Professional Indemnity Insurance
If you are a professional like a doctor, lawyer, accountant, or architect, you may in the course of your business cause financial loss, or injury to your client. You require Professional Indemnity insurance to protect yourself against all sums you may be legally liable to pay in such cases.
Your clients can make claims if they can prove negligence, error, or breach of contract on your part. Otherwise, your assets may have to be attached to satisfy a client’s claim. Therefore, having professional indemnity insurance as your sixth financial planning priority is in your best interests.
Regular Savings And Investments
Your seventh financial panning priority should be regular savings and investments. It is wise to save and invest at least 10% of your regular income. A regular savings and investment plan is a sure way of achieving your medium and long-term goals. Personal goals like saving for your children’s education, raising business capital, buying or building your own house, or saving for that dream holiday can easily be achieved through a regular savings and investment plan.
Offshore regular savings and investment plans can be cost-effective, and they have features that are more versatile than their onshore counterparts. A financial adviser can help you find a suitable regular savings and investment plan.
Lump Sum Investments
If you have followed through to this point, and your bank accounts are still holding more funds than you need for contingencies, you will do well for yourself if you use a professional fund manager to invest your surplus funds. This should be your eighth financial planning priority.
Fund managers have extensive financial market experience which they can use to guide your financial investments through the different stages of the economic cycle. They also have various investment strategies which are tailored to meet different investment objectives like income generation, capital preservation, capital growth, or a mix of capital growth and capital preservation.
Offshore lump sum investments can also be cost-effective, and they are more versatile than their onshore counterparts. A financial adviser can also be of help here. But if you are the kind of person who prefers the hands-on approach to investing, you can buy stocks, bonds, gold, silver, and other financial investments at your local securities exchange, but after thoroughly educating yourself.
Domestic Insurance
Your household can be your ninth financial planning priority. Domestic Insurance is designed to protect almost everything that you have worked hard for in your household. These includes the buildings, furniture, clothing, kitchen equipment, cutlery, electronics, domestic servants, indoor and outdoor sports equipment among others.
This cover can extend to include your liability either as an owner, or an occupier of the premises, to third parties, for damage to property, bodily injury, or death arising out of your use of the premise.
Scope of cover includes fire, theft, accidental damage, liability to third parties, and occupational accidents (death or illness to servants, including your liability as an employer at common law for acts of negligence). This cover can be arranged on buildings only, contents only, or for both buildings and contents. Yes, your house has to feature in your financial plans.
Travel Insurance
If you frequently travel abroad, chances are that you keep traveling beyond your local insurance area of cover. This especially applies to health and accident insurance. Travel insurance is what you need to cover accidental injuries, medical expenses, losses of personal effects, travel delays, hijack, personal liability, and legal expenses that you might incur while you are on a trip outside your country of residence. Most trips end without incident but there is that one trip where your travel insurance cover may prove to be particularly helpful.
Estate Planning
Financial planning ends with estate planning. A person’s estate consists of all real property, chattels, investments, interests in corporations, rites from lawsuits or structured settlement, or funds in the person’s name, held in partnerships or joint ventures, through a trust, or a joint ownership arrangement.
Estate planning is the process of accounting for the accumulated assets of your estate, and arranging for the distribution of those assets to your beneficiaries. Writing a will is also very important because it allows you to distribute your estate to your desired beneficiaries as you wish. Otherwise, some of your assets may remain unclaimed, and your estate will be distributed as per someone else’s wishes, not to mention the potential for conflict among your beneficiaries.
