Are your financially healthy? - Make Your Own Financial Plan!

In one of my previous blogs, I've tackled two types of income people can have - active income versus passive income.  As a short recap, active income is basically trading your time for money. Employees and self-employed people generally  fall under this type. Without their active work, no money comes in.

But when money starts flowing into your pocket from something that doesn't really require your physical presence, that  just means you're already earning passive income. (Good job!) Investments like in stocks fall into this category.  In more specific  terms, earning from investments is part of what's called as portfolio income. Passive income basically rests on a "system working for you". In investments, that system becomes money, so you have money working for you.

As you may notice, passive income can be small at the start while you're starting to build it up, but it can awesomely accumulate through time and may reach a point surpassing what your active income can offer. And that's the beauty about passive income that I really like -  the effect of compounding. The rewards of my efforts need not be restricted to a limited time frame. Whatever passive income source I'd make now can be my income source in the the coming years even  if  I decide to stop working on it.

And as graduate of engineering course brainwashed to always think about efficiency, I believe creating and duplicating passive income sources is the most efficient way of building one's wealth (and thus achieving one's goals).

That's why I've also emphasized that it's a lot better to have multiple sources of income. You should have not only a diversified investment portfolio but also diversified sources of income. When you do that, you position yourself to better improve your financial life. (You can read that blog here - How to Increase Your Cashflow). 

But income is only one part of the equation.

You've most probably heard a lot of stories about people earning big bucks but ended up miserably during their retirement years.

Just like in any undertaking, you would need to see the bigger picture of your financial life. And that means coming up with your personal financial plan to attain your financial goals. This financial plan will specifically assess how financially healthy you are.

So if you don't have one, let me help you begin creating a draft of your financial roadmap (I got the outline from one of IMG's module).

 

Photo credit

First, your personal financial plan should include:

1. Knowing where you are financially;

2. Deciding on the lifestyle you want; and
3. Estimating how much you should save to have enough passive income to sustain your chosen lifestyle when you can no longer earn active income.

Only with an updated personal Statement of Assets and Liabilities (SAL) will you know exactly where you are financially. SAL is the listing of all your Assets and Liabilities to estimate your Net Worth.  

Assets minus Liabilities will give your Net Worth. 
You can use below template in drafting your SAL:

Statement of Assets & Liabilities

ASSETS	AMOUNT
PERSONAL PROPERTIES
House and Lot (Present market value)
Car (Present market value
Jewelry (Present appraisal value)
Furniture, Appliances, Computer, etc. (Present value)
Others (Present value of your present personal properties
SAVINGS & INVESTMENTS
Cash on Hand (Cash you have)
Cash in Hand (Savings & checking account, TDs, etc.)
Mutual Funds (Stocks/equities, bond fund, balance, etc.)
Stocks (Power, Telecom, Real Estate, Holding, Food, etc)
UITF (Stocks/equities, bond fund, balance, etc)
Real Estate (Apartments, Rent to Own Units, Farms, etc.)
Memorial/Life plan (Cash surrender value )
Pure Life Insurance 20 year term(Cash surrender value)
Pension fund investment (Cash surrender value )
Long-Term Healthcare investment (Cash surrender value )
Receivables (Loans you have given to others )
Others
TOTAL ASSETS

LIABILITIES
Housing Loan (Housing loan still to be paid)
Credit card bill (Credit card balance)
Car loan (Car loan balance)
Bank loans (Bank loan still to be paid)
Appliance & Accessories (Loan balance)
Payables for Telephone, electricity, water bills
Gadgets & other non-moving items (appliances, toys, etc.)
TOTAL LIABILITIES

                                                                                                                           

NET WORTH (Total Assets – Total Liabilities)

 What is your present situation? (Is your Net Worth positive?) 

The next step is to make your Personal Income and Expenses Statement (PIES).

This is the listing of all your Income and your Expenses.
Income minus expenses will give you your Cashflow. 

Statement of Income and Expenses (Month of ____________)

Monthly  INCOME	BUDGET	ACTUAL
Income from job
Income from business
Other Income
TOTAL INCOME =

MONTHLY EXPENSES
BASIC EXPENSES
Household – food, groceries, cleaning, etc.
House rental
Electricity, Water, Cable TV
Landline & Mobile phone, Internet
Maintenance/repair: car, aircon, appliances, etc
Transportation: FX/taxi/bus fare, gas for car, etc
Medicine, food supplement, etc.
Shoes, clothes, personal care, etc.
Salaries for house helpers, driver, etc.
EDUCATION – Tuition, books, allowance, etc.
DEBT/LOAN PAYMENTS
Housing loan, Car loan
Credits Cards, Bank loan, Appliance loan, etc.
INSURANCE PAYMENTS
Life insurance, Healthcare, etc.
Fire & Car Insurance, Business Insurance, etc.
INVESTMENTS
Long-Term Healthcare, Pension plans, etc.
Mutual Funds, UITF, Stocks, Real Estate, etc.
OPTIONAL EXPENSES
Travels, dining out, movies, party, games, etc.
Magazines, books, gifts, DVD, etc.
TOTAL EXPENSES

CASH FLOW (Income – Expenses)

Where are you in your present situation? (Is your Cash Flow positive?)

After knowing what you have now, the next thing to do is to have your goals and need analysis.

At this point, you'd need to
(1) Know what you want and
(2) Know how to get what you want.

STEP1 : KNOW WHAT YOU WANT

NEEDS Analysis: What do you want?	YES	ALLOCATION in Millions	NO
1.       Comfortable & worry-free         retirement?
2.       Pay-off your debts – housing        loan, car loan, credit card, etc.?
3.       Guarantee your children’s        education?
4.       Enough savings for your future       Medical needs?
5.       Fund your parent’s retirement        & Medical needs?
6.  Own a decent house?
7.  Own a nice car?
8.  Travel and see the world?
9.     Save enough capital for Business?
10. Donate to church and charity?

                                                                                                  Total:    ____________ M

STEP 2: KNOW HOW TO GET WHAT YOU WANT

  GOAL: P ________ M after ___ years

How much can you afford to save each month at present? (Best effort)?
How much do you need to save each month to reach your goal of  P_______ M after ____ years?
BALANCE

With these rough figures in your mind, you can now assess your current  financial standing against your goals and come up with concrete action plans to reach them.

If you already made your personal financial plan, spend some time to review it to make sure you are still on the right track. If you have not done so, this is a good time to start. Only when you know where you are financially can you move forward to make your personal financial plan into a reality.

Your personal financial plan will keep you on the right track in making decisions on how much you should save and how you should invest from your savings. This plan is to be reviewed, if possible monthly, or at least twice a year. Early in the New Year is certainly a good time to make that review and the second time is about this time of the year.

People don't plan to fail; they just fail to plan.

When  I was doing mine, I felt the truth that we're really in charge of our lives.  It just affirms that I am really the one creating my life. It actually made me face myself head-on and ask  a lot of things and pushed me to think of ways on how to achieve the life I want. Quite scary yet liberating, haha.

So make your financial plan now.

Have fun investing (with careful planning)!
Omeng \_(",)/

PS:Send me an email [pinoyinvesting@gmail.com] if you prefer to have an excel-file for the SAL and PIES templates above.
PS2: International Marketing Group (IMG) is offering free seminars tackling topics like Practical Money Management & Creating Multiple Passive Income Stream. They offer it to general public for free.

It's basically their way of spreading financial literacy to everyone. As a financial products distributor company, it's also their way of highlighting the importance of financial planning. 

Email me - pinoyinvesting@gmail.com if you want  to attend one. 

The seminars can also help you refine whatever financial plan you make in the above exercise. They have various offices in and out of the country.  Bring your friends too.

PS3: You can also join IMG if you'd want to be your own financial advisor (thus saving yourself the product commissions) or just an advocate of spreading financial literacy. (I personally did because of the lots of trainings they offer to members). But that's going ahead of the story. Take the free seminars first if you haven't attended one.:) Send me a quick note - pinoyinvesting@gmail.com.