Essentials in financial planning

Top 6 tools in financial planning

It is essential to have good toolsbut it is also essential that the tools should be used in the right way.”   

Wallace D. Wattles

Financial planning is a science in as much as it is an art. What I mean is, while it is an art since goals and plans may be different from one person to another, to achieve the goals there are time-tested tools that need to be used to track your progress. This is the science part. It does matter how varied our goals are, the tracking tools are the same.

So what are these tools that are time tested, that we should all use? Allow me to get right into it.

1. Financial/Business planner:

This is the tool that captures your dreams and aspirations as an individual as well as a business owner. Before you track anything, you must have a plan. Plans can be categorized into 3 parts: Short term which is anything from 3 months to 2 years, Medium-term which covers 3 years to about 7 years and lastly anything over 7 years is considered Long-term. In business a business planner allows you to keep track of your important and strategic goals over time.

The reason you need a financial planner is that setting out plans is key because it focuses your attention, saving you from being distracted by the flavor of the month. Your focus remains laser-sharp, on what you need to achieve.

It is essential that the short-, medium- and long-term goals feed into each other so a series of short-term plans pour into a medium-term goal while a series of medium-term plans, add to a long-term goal. For instance, you may have two short-term goals the first being to build 3 months’ worth of an emergency fund, while the second could be paying off debt. The medium-term plan could be saving up for a deposit for land or a house or saving up to go back to school.  The long-term plan could then be buying a home.

So, if the short-term plan goes according to plan then, you will use the money that was previously going to pay off debt and save up for an emergency fund to save -up for the home deposit or school fees. The emergency fund allows you to pay for emergencies that come up from time to time and enables you to avoid debt.

Choose the best way to create your plan. Whether it be through a financial/ business planner as a physical book or the electronic version, whether it is through an app, my advice is, to ensure you have your plans well documented so you can refer back on your progress This you can do as often as is practicable for you, usually I check on mine quarterly and adjust where need be.

A written down plan also serves as a great motivator of how far you have come, and what you have achieved.

2. Budget

A Budget is essential because it gives us the license to spend, based on our income. It is the pot in which all our income and expenditure are consolidated. It helps us prioritize what is important to us. Working with a budget gives you the freedom to organize your finances in a way that you get the desired impact. I don’t know about you, but whenever I don’t use a budget and spend money, I’m always fighting off feelings of guilt because often I am not sure of whether I have taken care of all my priorities, as I indulge.

On this, document your total income and expenditure. Whether you prefer paper and pen, a spreadsheet, or an app go with what you like, the whole idea is to be consistent.

For best results be faithful to the budget you make each month. The best way I have found to do this is to include life’s little pleasures in your budget. This will motivate you to do the “not so pleasant” things on your budget.

Tools and Financial plans

3. Income Tracker

The average millionaire has at least 5 income streams. Now that is an intimidating number for some of us, but you know what don’t be. It is what we all need to aspire to, so buckle and start monitoring what is coming in for you. If it’s the net salary from your employer, or your business write it down and track it monthly. If it’s net income from your side hustle, note it down.  Rental income, dividend, and interest income. All these write them down it will help you keep track of your total income.

4. Net worth tracker

Your net worth will be the number that remains when you subtract your total assets from your total liabilities. Assets are the things that you own with a monetary value e.g., House, car, land, business, shares, etc while liabilities are what we owe. For instance, mortgages, Car loans, Sacco Loans, student debts, etc.

For some of the people that do not know their net worth, it is because they are afraid of what the numbers look like. My encouragement on this is it is difficult to work on what you don’t want to confront. It is better to face the truth however ugly so that you can build up the future you want to have.

So, get your preferred tool and have everything noted down and then make a plan for the future you want and then keep your eye on the numbers as often as necessary.

5. Investment tracker

There are various investments that we can use to create wealth. The trouble for some of us is we do not keep track of our investments and how well or not so well they are doing. Do you know the true value of the land you are holding? I don’t mean the estimate you have because you heard someone wanted to sell land at a certain price. How well are your shares doing at the stock exchange or the Sacco or in your investment club? Do you look at your monthly statement from the unit trusts, Do you know how much you have in retirement savings at the pension fund or the National Social security fund.

Make a list of your investments and track their movement. It will help you to know what is working and what is not working, and you can then adjust according to your goals.

6. Expense tracker

One of the very first things you should do along with creating a financial plan and a budget would be to know your expenses. Most of us think we know all our expenses until we track them and realize that we have financial black holes where our money disappears to. Okay, it may not be that dramatic, but you get my point, knowledge is power. I think for best results, track your expenses for at least 3 months. The reason this is important is for one month you may be conscious of your expenditure, and it may not give the right reflection, however, if you track for a long time chances are you will lower your guard and the results you see may be more accurate. Now, mind you, it is not an easy exercise, recording all your expenses daily, but it is well worth it. Sometimes we mindlessly use our money, and this exercise allows us to confront this truth about ourselves.

As in the earlier trackers, use a tool that is easy for whether, a book, spreadsheet, or an app. And be honest with yourself, because some of the savings you are looking for may be found in cutting back non-essential expenses.

Wealth creation is about knowing your numbers as much as it is about living abundantly, we’ve got to keep our eyes on these numbers as we continue with this journey. Only then will our hard work and sacrifices make sense. Remember, I’m rooting for you!

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