Day#25: Make a financial plan for your future.

This is Day #25 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Here’s today’s installment and the concluding article of the series:

Today’s Task: Make a financial plan for your future

Your ability to succeed financially for the rest of your life will partly fall on your ability to mitigate large, life-defining expenses. The more aware you are of your possible expenses while you’re still young, the better prepared you’ll be for them. Once you’re debt free and have reached your goals for your emergency fund, it’s time to think of the following things:

• Wedding. This is for the unmarried Frugal Pinoy readers out there. Even if you think you’re not going to get married or that you’re going to have the simplest wedding in the history of the Philippines, you can’t know this for sure. This is especially true if you aren’t even engaged yet. Saving up for it is better than spending your honeymoon worried about debt before your marriage has even really begun.
• House. Most Filipinos dream of owning a home. If you think this is for you, start researching ballpark figures of houses that are similar to the one you want. You don’t have to save up for the complete amount, either (though it’s ideal). At the very least, start planning for the down payment.
• Vehicle.
• Travel. If I only knew how much I wanted to travel I would’ve saved up for it more, especially since I prefer 2-week trips to weekend getaways. Having a travel fund - even if you have to replenish it regularly - allows you to take advantage of discount fares and accommodations as the opportunity arises. This way, you can enjoy your trips without worrying about money, and you’ll have more options available to you.
• Additional education. Want to take up a second degree or pursue higher education? If you’re planning to do this within the next 3 years, then save up for it now - especially if you’re planning to study abroad, where the cost of living is generally more expensive.
• Supplementary income source. These could include investments, businesses, or rental properties. Ventures like these require capital upfront. This is especially important since it relates to your income, and you won’t have to be dependent on your paycheck.
• Children. I’m lucky enough to be in the position to plan for a child (my partner and I will adopt) so there are no “surprises” along the way. I’ve observed firsthand how expensive having children can be, even if they eat very little for the first few years of their lives. Baby formula is expensive, so are medical expenses, clothes, and education. Speaking of education, it’s smart to start planning for that even before your children are born.
• Retirement. A bank teller once laughed at me for having a retirement at the age of 24. It’s not a laughing matter if you consider compounding interest. The younger you are, the more important it is to start your retirement fund no matter how small. Even P500 per month can starting now can become hundreds of thousands of pesos down the road. Use this compound interest calculator to try it yourself (don’t mind the dollar sign and don’t forget to take inflation into account by subtracting it from your interest rates).

Now, if you’re not yet debt free or if you’re still waiting to complete your emergency fund it doesn’t mean you shouldn’t prepare yourself for the above expenses. It might help to work on your financial plan for at least one of the above items as well.

How to Make Your Financial Plan

Drafting your financial plan can take a few minutes to a few hours, depending on how detailed you want to be. Among the items listed above, I’m going to pick “House” to use as an example. Here are the steps I’d take to plan buying a house:

1) Find out how much it costs, total. For the house, this includes the house and lot itself, fees for the real estate agent (if necessary), moving expenses, and other relevant fees. If you want to buy an existing house, factor in what repairs and maintenance costs you could possibly have - but only if you already have a specific house in mind and can compute these things accurately. In the house example, let’s pretend that the total costs are P900,000 (I know it’s cheap for a Metro Manila home, but it’s just an example).

2) Know the month and year when you hope to finish saving up for it and make this your deadline. Let’s say I want to have a house by January 2013. Having a deadline like this will allow me to factor in inflation, as well as any changes in my regular income or expenses.

3) Compute how much you need to set aside each month to save up for the complete amount by the deadline. Since I want the house by January 2013, I need to set aside around P25,000/month to have the complete amount by then.

4) Figure out if your monthly budget allows for it. If it does, great! You’re all set. If not, then you need to take a cold hard look at your income and expenses to see where you can cut spending or increase your earnings. Investing your money, engaging in part-time work, or starting a business may help you with the earning part. After all, there are only so few expenses you can cut back on, especially if you’re frugal to begin with. Just remember that normally, if you’re saving up for something you want to have/do within the next 3 years, you should pick more conservative investments. But with things you’ll need 10 or 20 years down the road (such as retirement), you can be more aggressive.

What major expenses are coming your way within the next few years? How are you preparing for them?

Image by sorin_el from sxc.hu