Defining Financial Planning: Why Do We Need It?

defining financial planning
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Defining financial planning

Financial planning can be defined as the process of taking a comprehensive look at your financial situation and building a specific financial plan to reach your goals. In financial planning, the end result is an actionable financial plan which will help to achieve your financial goals. This plan is a comprehensive evaluation of an individual’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans.

Can a person develop his/her own financial plan? Definitely! However, unless that person is well-versed in financial matters, something might be overlooked in the plan. Thus, it is better to develop a financial plan with a financial planner.

For a financial planner, financial planning is the process of assisting clients in determining their financial goals, objectives and priorities, and the resources to meet them in an optimal and practical manner. In Malaysia, you should find a licensed financial planner to assist you in this task.

Why do we need a financial plan?

Financial plan is akin to the roadmap to our financial goals. Like a roadmap, we need to have a starting point and a destination. The starting point is our current financial standing – cash flow, assets, liabilities and net worth. The destination is our goals. These goals can be as simple as saving for a vacation to as complicated as having enough for retirement.

By taking into account your current resources with some assumptions, we can project the value of these assets into the future. Together with the value of future resources, we can determine if you will be able to attain your goals. If there is no deficit, you will be able to achieve your goals.

A financial plan is not set in stone. As life goes on, circumstances and goals might change, so the plan also needs to be reviewed and adjusted to reflect the changes.

Role of a financial planner

Let us use a medical analogy. A person who meets an accident and suffers injuries is admitted to the hospital. During examination, the doctor found out that other than the injuries that require surgery, the patient also has some underlying conditions that require treatment. So, what will the doctor do? The doctor will treat the most critical issue first, which is the injuries sustained from the accident. The role of a financial planner is akin to the doctor. The planner will triage your financial condition and develop a plan to achieve your goals. Let’s say you currently have a high interest debt that is impeding you from attaining your goals, the planner will help you to find ways to settle the debt first. Furthermore, the financial planner will also continue to monitor your progress and work together with you to achieve your financial goals.

Comprehensive financial planning

In comprehensive financial planning, the financial planner will go through the following aspects:

1. Personal finance review

2. Retirement planning

3. Education planning, if applicable 

4. Tax planning

5. Investment planning

6. Insurance planning 

7. Estate planning

It encompasses every aspect of your finances and is the most complete plan for your financial matters. As these different aspects are interlinked, comprehensive financial planning will make sure that no one aspect is overlooked.

Modular financial planning

If you do not want to let the financial planner knowing every detail of your finances, you may choose modular financial planning. In modular financial planning, the planner will work with you on the area that you choose. The limitation is that as the information is not complete, the planner’s advise might be optimised for the task engaged but might not be beneficial in the other areas.

How to choose a financial planner?

The first thing is to make sure that the financial planner has a licence from Securities Commission (SC) Malaysia. You can check from the SC online register (Link). The planner should at least have a Capital Market Service Representative Licence (CMSRL) in financial planning. You can also check on licence of his/her firm at the same place. Some financial planners also have a Financial Advisor’s Representative (FAR) license which allows them to deal with insurance matters.

After this preliminary screening, the most important factor is trust. Do you have confidence in the planner’s competence and is he/she worthy of your trust? As this relationship involves the handling of your money, the planner must be trustworthy. It is important to look for the one whom you can trust for this relationship to work well.

Besides that, you should also consider the compatibility of your character with your planner’s. You have to be comfortable in working with your planner so that you would not feel awkward or it is a dread to meet with the planner. Financial planning should be a fulfilling journey, not a stressful torture.

Your relationship with your financial planner should be long term as financial planning is a lifelong process. However, it does not mean that you are stuck with the planner forever. If you are unsatisfied with the service provided, you could always engage a new planner. Nonetheless, a frequent change of planner might not be good due to the loss of continuity and you have to start anew with another planner. Thus, it is much better if you can engage your ideal planner at the beginning.

If you are interested in working with me to improve your finances, just leave your details here. I will reach out to you and see if we would be a good fit for each other.

Disclaimer: This post is for informational purpose only. You should use judgment and conduct due diligence before taking any action or implementing any plan suggested or recommended in this article.

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