The following is the third in a series of five articles that shares excerpts of learning and insights gleaned at the Jamaica Teachers Association's very successful investment seminar series, which were held recently across the island.
Paul Taylor, Contributor
IN MY job of providing investment advice and counselling to clients and prospects, I am often told that while the importance of establishing a comprehensive financial plan cannot be underscored sufficiently, it is sometimes not treated with the seriousness it desires. In fact, I often discover that some persons find it difficult to put such a plan in place, let alone sustain it. When the dust has settled, this tried and tested approach to effective personal financial management is not only vital, but one ought not to ignore its implementation.
I contrast the state of not taking charge of your finances, with my own earlier efforts at adopting an effective and sustainable exercise programme. While convinced of the indispensable part that such an exercise programme plays in sustaining a healthy lifestyle, I was always procrastinating. "Boy," I would often say to myself, "I am going to adopt a comprehensive exercise regime to remain well." But unfortunately, I just never got started. I later adopted an exercise regime however, when I finally decided to powerfully take charge of and accept responsibility for this important aspect of my personal health and well-being.
I started exercising slowly, being mindful not to shock my system, and incrementally stepped up the pace by including new routines in this my self-made exercise programme. Conscious of the importance of a support system to aid me along the way whenever I felt like quitting, I ensured that a physical trainer was in place to provide the requisite support system. I also discovered that with determination, discipline and consistent effort, I could get better at living healthily, looking and feeling better, as well as having more energy to tackle the dynamic nature of an exciting and highly enriching career.
I have merely provided the above synopsis of my own efforts at establishing a healthy lifestyle to spur you to powerfully take charge of and accept responsibility for your own personal financial planning and budgeting to ensure success at it.
As with every new area of endeavour, one has to take time out to research and procure the requisite information needed to get started. So let's now explore some facts, tips and strategies on the financial planning process and some of the requirements needed to establish a good financial plan, which both the sophisticated and ordinary investor need to assist them to make effective financial decisions.
FINANCIAL PLAN
Simply put, a financial plan is a set of actions geared towards assisting an individual to achieve his or her financial goals with a view to assuring financial well-being throughout his adult life. It involves a range of financial matters such as personal investment management, estate planning, as well as life, health and general insurance. An investment policy statement (IPS) provides a useful framework within which such a financial plan can be structured.
INVESTMENT
POLICY STATEMENT
While there are many approaches to establishing a financial plan, the IPS framework provides an excellent guide that can be personalised to meet your needs.
It serves as a comprehensive planning tool and structured methodology to assist you in achieving your personal financial goals. The investment policy statement looks at your current financial position your net worth, income and expenditure as well as your financial objectives and constraints. It then seeks to provide a set of recommendations (given your financial objectives) to guide your future saving and investment decisions. These recommendations are geared at ensuring that the investment vehicles, or financial products in which you invest and save, are structured and properly diversified to allow you to better meet your stated financial goals. Working in consultation with you, your financial advisor would usually prepare the IPS, in keeping with the corporate guidelines of the particular investment house to which the financial advisor is employed.
Issues such as one's personal risk profile (or one's overall tolerance to changes in investment risks and returns, which go hand-in-hand); macroeconomic variables such as interest rates, inflation rates, exchange rates; and asset allocation (that is, what accounts and financial instruments you use to assist you in achieving your financial goals); the psycho-graphic and lifestyle factors that inform your incomes and expenditure patterns are all explored in detail to ensure that financial and investment recommendations are tailored in a manner that make their realisation more feasible.
BUDGETING TEMPLATE AND STATEMENT OF NET WORTH
Although far from being a panacea for all things financial, the investment policy statement has a number of critical components, the mastery of at least two of which can assist you to begin making your money work for you. The two such components of which I speak are a statement of net worth and personal budget.
Like the owner of a business enterprise, it is always useful for an individual to know his net worth, in other words whether his assets (house, car, investments and/or other personal valuables) exceed his loans and/or other debt obligations. If that is not the case, as sometimes an individual's debts do exceed his assets, then such an individual can begin to implement cost containment strategies and/or expand income sources to arrest and eliminate such an unwelcome state of affairs. It is important to note that in this context, I am referring to situations were one's own debt obligations hinder one's enjoyment of peace of mind.
The point here, which should not be lost, is that debt, in and of itself, is not a bad thing. When managed effectively, debt can allow an individual to consolidate
and strengthen his or her asset base as well as leverage available opportunities in the marketplace. Debt merely poses a problem when it is managed poorly. Concomitantly, the construction, diligent and consistent use of a personal budget to guide one's incomes, savings and expenditure decisions is critical here. To be sure, when one considers these matters carefully, it is through a disciplined and sustained budgeting exercise that one will be able to get rid of or minimise ones debt levels.
TRUTH BE TOLD
If the truth be told, within the context of one's financial goals and changing life realities, the regular and sustained assessment of one's budget and statement of net worth are perhaps two of the most intrinsic, yet vital tools one can readily pursue to assist one in gaining control over one's finances. However, as straight-forward and commonsensical as these tools are, the sad truth is that so many of us do not implement them. Some of the responses I often get from client prospects on constructing and maintaining a budget as a tool to effective financial planning and money management include: -
" Meh jus caan bother wid the budgeting thing, it tek too much time feh duh and manita!"
" I have no time to do a budget; its too tedious and it won't balance anyway."
" I will just be frustrating myself, as I know what will be the outcome expenses will far exceed my income."
Herein lies one of the primary root causes of why we often do not get started to gain control over our money: We often do not choose to adopt a positive attitude that will propel us to get started and never look back. Consequently, we sometimes find ourselves being held as hostages trying to make that dollar stretch or merely making ends meet. While some of us who are employed find ourselves entrapped and seriously challenged as we struggle to keep our heads above the waters living from pay cheque to pay cheque.
By the way, do those negative comments on budgeting resonate with you or do they sound familiar to you? While I usually hear such negative comments while on the job, far from being frustrated by them, I merely see them as an opportunity to point out to client prospects why it is all the more important that they urgently determine their statement of net worth and move to establish a budget that will allow them, once and for all, to take charge of their finances.
So important is this issue of budgeting that the next article in the series will delve, in more depth, into this very useful aspect of financial planning. Undoubtedly, the discipline of managing your money within a structured framework cannot be over-emphasised if you are to achieve the financial goals you create for your life. It is also important to have a support system to encourage you to get started and never look back, and this is where the services of a qualified, approved financial advisor takes on even greater significance. If you do not have such an advisor, it is my hope that this article has spurred you to get one. So now that you know, go and procrastinate no more. Get advice on how to establish a sound financial plan and be sure to use it. You will be amazed how such a plan will assist you in making your money work for you!
Paul Taylor is corporate sales manager at Jamaica Money Market Brokers Ltd and a member of JMMB's senior management team. He can be reached at 968-4669 or paul_taylor@jmmb.com.
