In our previous article, we established that the Financial Planning Framework is the context in which you allocate God-given financial resources to meet personal needs, obligations arising out of your God-given roles and to enable you to accomplish God’s calling on your life. To accomplish this, you need a process that is objective, provides structure to your thinking and eliminate self-sabotaging biases. A clear process will enable you to work well with other stakeholders such as your spouse and your Financial Planner while making it easier to evaluate the decisions made. The aim of this process is to finishing well; hence, it incorporates the desired end right from the beginning of the process.
In the words of Ron Blue, a Christian Financial Planner and author, Financial Planning is the ‘process of allocating limited financial resources to unlimited alternatives’. Your needs will usually exceed the financial resources available and hence the need to plan and prioritize the needs. Without proper planning, you are likely to leave out allocation of resources to certain needs such as retirement that may not seem a priority now but may cost you dearly in the future. The planning process enables you to have the bigger picture in mind as you formulate specific actions you will take to realize your vision.
The process is comprised of seven stages, briefly explained below:
- Establishing current financial position: I can compare this exercise to a visit to a doctor for a regular health check-up or when unwell. The consultation begins with taking basic vitals such as body temperature, pulse rate, respiration rate, and blood pressure, which give an indication of your health status. Similarly, there are financial vitals that give an indication of your financial wellbeing and serve as a basis to measure progress. These are:
- Assets: Specific things of value that you own
- Liabilities: Money you owe to other people
- Net worth: Established by deducting your liabilities from your assets
- Cash flow: Your incomes and how you spend it
- Setting goals: This process enables you to cast a vision for not only your finances but for your life. You establish your priorities in the form of immediate, short-term, and long-term goals. These goals include giving, savings and investments, debt repayment, paying taxes, funding your lifestyle, and for some people, starting a business.
- Budgeting: Once you set the goals, you develop a spending plan that allocates all available income to specific priorities in a given period such as a month. This includes:
- Savings: By spending less than you earn you put away the surplus as savings to meet future goals.
- Tax efficiency: As you allocate your resources, you ensure that you are tax efficient and you are not paying more tax to the government than you should.
- Investments: This involves clearly defining your investment objectives and applying your savings to specific investments to meet specific goals.
- Managing Risks: As you acquire assets, you will need to protect them against loss or damage. Meanwhile, you determine your life insurance needs to provide for your dependents in the event of your premature death or inability to generate an income due to an illness or an accident.
- Retirement Planning: This involves setting up financial as well as non-financial plans to take care of your needs in later life.
- Estate Planning: As you accumulate more assets beyond your lifetime financial needs, it is important to plan how you would wish to have your assets distributed to your beneficiaries.
The output of this process is a financial plan or a strategy that guides you on the course of action to take to reach your specified goals. It is necessary to review it regularly and as your circumstances change.
While some people may have the expertise, skills, and the tools to apply the above process, others might struggle. If you need assistance, please get in touch with me and let us have a conversation on how we can work together.
The scriptures have a lot to say regarding the need for planning. Below is just a sample of verses on this subject.
- Amos 3:7 (ESV): “For the Lord God does nothing without revealing his secret to his servants the prophets.
- Luke 14:28 (ESV): For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?
- Proverbs 27:23 (ESV): Know well the condition of your flocks, and give attention to your herds.
- 1 Timothy 5:8 (ESV): But if anyone does not provide for his relatives, and especially for members of his household, he has denied the faith and is worse than an unbeliever.
- 1 Corinthians 14: 33a (ESV): For God is not a God of confusion but of peace.
Verse 40 (NIV): Everything must be done in a proper and orderly way.
In our next article, we will look at financial planning in times of great uncertainty such as facing potential or imminent loss of a job or business.