“Balance is the key to everything. What we do, think, say, eat, feel, they all require awareness, and through awareness, we can grow” – Koi Fresco.
The highlighted words balance, awareness and growth in the above quote are key elements of making wise decisions. This can be further narrowed down to making financial decisions. It is important to be mindful of one’s needs and goals in order to have stable growth. This piece seeks to give an overview of how to approach your financial goals by identifying and managing them accordingly in line with your cashflow so as to be efficient.
In recent times, many people have been known to invest in the first financial product that is introduced to them without taking out time to evaluate their financial needs and goals. While investing is good, poorly investment decisions can limit the opportunities that your resources can bring to you. This brings us to the importance of financial planning, which involves having a holistic assessment of financial circumstances and future goals.
Who needs financial planning?
Individuals and Companies at different levels in their lives and business respectively. In the lifetime of every individual, the financial goals will differ at various ages. This may be as a result of status, responsibilities, and so on. Take for instance, a young individual within the ages of 15-18 living with his parents or guardians, having all basic amenities sorted, and he also receives regular allowance. He would probably only save up money to meet financial goal like getting newest the video games or Nike trainers. This is no comparison to the financial goals of the parents who provide the basic amenities, secure the future of the child by putting him/ her through school amongst other things which are in both short term and long term.
Also in companies, based on the vision and mission of the owners or shareholders, financial planning allows businesses to envisage what financial decisions need to be made in order to grow and a market leader among competitors. These decisions may include licenses, expansions, expertise onboarding etc. If not taken into perspective early enough, the implications of not planning will creep-up and the business can run into crises, or even fail.
In approaching our financial goals carefully, we become aware of the probable possibilities towards its attainment. Goals are generally classified as either being short-term or long-term, depending on how long it will take for the need to materialize. Short-term goals are usually goals that can be achieved within 1-2 years. Financial endeavors here could include monthly utility bills, annual membership subscriptions for associations, servicing and maintenance bills, repayments on debts, etc. On the other hand, long-term goals take a longer period, like 3 years and above. Examples are, buying a house or a car, saving up for a master’s degree.
In approaching these objectives, there are various investments that can be adopted towards meeting them. It is in applying them appropriately that we match our investments with our financial goals. According to Investopedia, the matching strategy talks about how the individual or company should acquire investments in which their payouts will coincide with their expenses or obligations. Investments are in various forms such as equity, fixed income instruments, derivative, real estate.
Payout is when returns on the investment is realized. Short-term investments, also referred to as money market instruments, include fixed deposits, mutual funds, commercial papers, and treasury bills (T-bills). These can be applied to meet short term needs, but one must also take into consideration the risk attributed to the instrument and the way returns are redeemed. Take for instance Treasury bill, irrespective of the number of days you sign up for, interest is earned upfront even though they are very secure. Keying into a T– bills to meet financial obligations due in 90 days is a mismatch of the investment to the financial goal because T-bills will take longer than 3 months to mature and give payout. Mismatching can also occur when we obtain long-term securities to cater for short term financial needs. For example, investing in real estate like building to sell and meet monthly utility bills. In doing this, one can face crises that can arise from not properly aligning investment opportunities to financial needs.
The ideal for matching investment to financial obligations is to ensure that short term investments should be first used to meet short term obligations, likewise for long-terms. Furthermore, the associated risk(s) and the payout period should be investigated for each investment one desires to commit to. Once these have been identified, then the best return on investment along that line should be sought across investment firms. These easy tips will aid financial planning literacy, avoid waste, maximize returns and lead to security for the future.