We strongly encourage every person to prepare their financial investment plan (FIP). Exactly why is a FIP important? There are various reasons why the FIP is the best tool one can possibly use to manage their finances. The major benefits are:
Financial Status at a Glance
The FIP gives a summary of incomes received, taxes paid, debts repaid and expenses paid for over a given period of time. This summary is used to compute (in percentages) how your earnings are distributed between the different expense items.
The information so presented provides an invaluable tool for planning and decision making.
Know your Net Worth
Do you know your Net Worth? Do your liabilities exceed your assets? No? Yes? I don’t know? I’m not sure? I can estimate?
All these are possible answers, but the ideal one is No. If your answer is ‘No’, by how much do your assets exceed your liabilities? It is important to have a figure.
If your answer is Yes meaning that you are deep in debt, what is the level of debt? Such knowledge would be a first step towards walking away from your financial troubles.
The FIP documents your recurrent expenditure and you will be surprised to realize that a huge chunk of your income goes towards unnecessary expenses which can be eliminated altogether. Such monies can then be redirected towards debt repayments or savings. By so doing, you will have better control over your finances.
Create Financial Goals
Perhaps you have been saving or better still, investing. Why are you saving or investing? To: Buy a car? Purchase property? Further your education? Fund children’s education? Build emergency fund? Go on vacation? Save for retirement?
The FIP will help you identify your financial goals. These financial goals will help you quantify how much you should be saving, determine the best investment vehicle for such savings and more importantly, they will motivate you to achieve the targets that you set.
The FIP defines the timelines within which each financial goal should be achieved. This increases the element of control and assists in planning. Instead of living one day at a time, you can forecast the activities you will be engaging in during future periods. For example, undertake Masters Degree in year 2018; purchase land in year 2019, start building a family home in year 2022.
Asset identification, valuation and optimization
The FIP records the assets you own, when you purchased them, their value at the time of acquisition and their current value. This information can then be used to determine the optimal use of each asset.
For example a plot of land purchased several years ago at Kshs. 300,000 may now be worth Kshs. 2,000,000. It may also have better access to water, electricity and social amenities. One may decide to develop it; to sell it and pay off an outstanding mortgage or to sell it and start a business. The FIP will prompt you to constantly think about your assets and assist you in making informed decisions about their best use.
Motivation to earn more
Once you put together the FIP, you will have higher regard for your shilling. Inevitably, you will look for ways to increase your earnings so as to achieve your financial goals within a shorter period.
Understand your debt
You may be having some outstanding liabilities which may be in the form of bank loans, SACCO loans, credit card balances, mortgage, loans from friends and family, etc. Most times, debt comes at a price in the form of interest. You will be required to repay the amount you have borrowed together with the interest charged.
It is critical to know how much you will pay as interest for any debts that you currently have. This will give you an opportunity to explore alternative avenues of financing to mitigate the interest charge, reorganize your loan repayment schedule and guide you in making future decisions on debt financing.
You may be surprised to learn that the SACCO loan of Kshs.500,000 you took at an interest rate of 12% p.a. will have cost you Kshs.200,000 (interest) over a four year repayment period.
Informed Investment Decisions
Having documented your incomes, expenditure, net worth, assets, debt levels and financial goals; you will be fully equipped to make decisions on how much to invest and the period of each investment. We may assist you in determining the investment product that matches your need, although even this may not be necessary due to the interactive approach that we adopt in developing you FIP.
Your progress towards achieving your financial goals will be monitored using the targets that you set for one, three and five year periods. You will be encouraged to informally monitor your progress for three and six month periods in the course of the first year. Periodical review of the FIP is also vital especially when there is a significant change in your financial status.
Such monitoring ensures that you steadily move towards attainment of your financial goals and targets over the short and the long term.
Do you want to prepare your Financial Investment Plan (FIP)?
If yes, contact Charity immediately on firstname.lastname@example.org and start your journey towards financial independence.