Your financial plan: Where are you now and where are you going?

When she turned 21, Sharon Cuneta took financial control of money earned since her first record, "Mr. DJ", was released seven years earlier. By all accounts, the singer/actress has since managed her money well–spending less than what she earned, investing wisely her surplus funds, and planning a more than comfortable future for herself and for her daughter, KC Concepcion, that included regular trips abroad and schooling in the best possible schools. At any given point, she knows how much she is worth.

Today, Cuneta has two other daughters, both of pre-school age, which she has now included in her financial plans and Concepcion is studying in Paris.

Cash Flow

Many other people set financial goals but do not have an accurate idea of their cash flow or their net worth, so they cannot set realistic financial goals and invest effectively. If, for instance, your assets are worth about P500,000, then it would be foolhardy for you to invest P1 million. Similarly, if you have assets worth over P1 million and you have just P100,000 in investments, then you are losing out on a myriad of opportunities.

To get a clearer picture of your overall cash flow, it is sensible to first do it each month and, when you see the monthly pattern, to do it annually.

Hopefully, your cash flow is a positive number but, especially if you are young, it may not. The pressure to finance the shortfall by taking out loans may be great but the interest payments on the loans simply increase your cost of living. It is far better to reduce your living expenditure to the point where there is a surplus available.

The surplus or difference between your net income and your expenses is the money you have available for savings and for investment. It is better not to view savings as what is left over from the expense of daily life. Make regular savings on a monthly basis and treat these as a living expense to ensure that you are continually building surplus for investments.

Net Worth

Your net worth is your total assets minus your total liabilities or debts.

Assets may be broken down into the following: cash, financial investments, and fixed assets. Cash would include current accounts, time deposits, foreign exchange, life insurance, and retirement funds. Financial investments cover equities, bonds, mutual funds, and pension funds. Fixed assets would include real estate, including your own home, vehicles, jewelry, and equity in a business, equipment, and art.

Liabilities could be broken down into short-term and long-term obligations. Short-term liabilities are debts such as utility bills and monthly credit card payments that can be repaid within the year. Long-term liabilities such as bank loans and mortgage payments take more than a year to repay.

As your wealth grows, it becomes harder to make an exact calculation of your net worth because many of your investments will fluctuate in value. Knowing your net worth is important for asset allocation and long-term planning so you only need to calculate it once or twice a year or when you are making a major financial decision.

List your assets, such as your home, at their current market value and show any related debts such as a mortgage debt under the liabilities heading. It is important for you to know how to value your assets. For real estate and equipment, you can engage the services of an appraiser. There are, however, acceptable shortcuts such as the going price of real estate in the vicinity of your property. There are also professionals who can appraise the value of art works and jewelry. Stock prices may be estimated, using the latest market costs, which you can get from the business section of local newspapers.

If you hold assets not just in pesos but in other currencies such as the American dollar, note the currency in which they are denominated and their current value in pesos.

If your net worth is low or negative, there is no need to despair. Your net worth is not your score in the game of life; it is just a measure of how far you have progressed in building your wealth up to this point in time.

Now that you have obtained a realistic picture of your financial position, you can start making positive plans for the future.

List Of Goals

The way to do this is to make a list of your goals that involve money. They can be short term (a vacation), medium term (a new car), or long-term (your children’s college education). List them in the order that they come into your mind and allow yourself to include items that seem very hard to attain.

Once you have written down every possible goal you can think of, try to make an accurate estimate of what each one would cost in today’s money. This could require some research. For example, if you would like to retire in Australia, you would need to do some research to discover the financial requirements for immigration and also the average prices of houses in the area in which you would like to live. Doing this preliminary research for each goal could come in useful later, even if the goal seems very far away in the future.

Next, prioritize your list of goals, ignoring their cost and their time frame. You can either rank them in order of priority or group them into categories such as "essential", "desirable", or "nice but not very important".

The way you prioritize your goals is a personal decision and it will probably change in time. Although each goal that you choose or discard may have important consequences (for example, you can choose not to pay off expensive consumer debt), there is no single set of financial goals that is appropriate for everyone.

Now, you can add up the cost of all the goals on your list. If the total is affordable, given your current assets and income, you are very fortunate–and in a very small minority! It is more likely that you will need to pare down the list to make it more realistic. Don’t throw away the original list. It could be useful later when your wealth has grown.

How To Best Invest

You will probably need to speak to a financial adviser to help you best invest to achieve your goals. In general, short-term investments tend to be speculative and cannot be relied upon to fund your short-term goals. It is best to plan to pay for your definite short-term goals out of your existing or future savings.

As your wealth grows, good record-keeping becomes important. You need to be able to check bills and investment settlements for accuracy and to also monitor your progress. Choose a record-keeping system that is simple to maintain on a regular basis.

It is suggested that you use spreadsheet computer programs like Excel but pen and paper is also a good option. Make two columns, one for assets and another liabilities. In the asset column, list down all your assets at their current market value. You own home, for example, is an asset. If you purchased your lot 20 years ago at P500,000 but it is now selling for P6 million, then put down its value at P6 million. Then, on the opposite column, list down any debt related to it, such as mortgage payments or taxes due. Make a note that some assets lose out on their value through the years. For example, a car bought for P800,000 last year could just be valued at P600,00 this year because of depreciation. The same is true with equipment.

If you don’t enjoy this kind of work, you could ask another family member to do it for you. Take the time to review these two statements and make notes of any issues that arise.