Do you know where you are going?

We have five months to go before the year ends and many of us still aspire to have a Personal Financial Plan. However it remains simply that! An aspiration. In the meantime many of us are executing and following the “Do Nothing Plan”. Other people may think that they actually do have a financial plan but it is only a counterfeit version and beneath fancy terminologies it leads nowhere. You choose the “Do Nothing Plan” and you will end up with exactly what you chose – NOTHING! You take the Personal Financial Plan and you will end up achieving your financial goals. So how do you know which plan you are truly on. Read on as I briefly illustrate in this article the differences between the two as well as the outcomes the two types of plans will lead you to.

A Personal Financial Plan has an identified destination. Say you were planning a trip out of the country to South Africa. As you book flights, you cannot simply tell the airline you want to fly to South Africa. You would have to say the specific location in South Africa e.g. Johannesburg, Cape Town etc. The plane cannot simply from the air drop you into South Africa. It has to land at a specific town and at a specific airport. A financial plan identifies in the same way a specific destination. An example of a specific goal would be “I want to retire in 10 years hence need my investments to be generating an income of Kes 400,000 per month then (at time of retirement)” or “I want to raise college fees for my daughter in 10 years and I will require Kes 2 mn then” Remember the cost of things today is not what it will cost in the future so a Financial Plan always works with what it will cost at the time you want to have met your objective. So if you are just saving for the sake of saving without having thought through what the end objective in financial terms actually is, you risk achieving nothing at the end of the day. If the objective is not defined, you may also end up being distracted and using those savings for something else unrelated to your goals.

A Personal Financial Plan involves accumulation of Assets. Assets are the vehicles that help you achieve your financial goals. On your trip to South Africa if you decided to fly, the plane is the “vehicle” by which you get there. The assets we use on the journey to our financial goals will sometimes keep your money safe, sometimes generate an income, and sometimes grow in value. Back to the example of being able to retire and build investments that will give Kes 400,000 in monthly income. I may start doing investments in shares, which will grow the value of my funds over time and then at some point switch to investments in property that I can rent out and generate a monthly income. The shares and the property have become the vehicles that I use. If you are not in the process of accumulating assets you are clearly in the do nothing plan. If you are accumulating assets without linking them to the end objective, they may also end up not working for you. I have recently worked with a retired couple that invested in lots of land as they worked. In retirement however they found that they had nothing that was generating income, which is what they really needed.

A Personal Financial Plan identifies the resources that can be used. What would you need to actually board this flight to South Africa? You would need a ticket, passport and a visa. Those are your resources to be able to access this vehicle that transports you to your destination. In your financial plan, what are the resources that you have at you disposal? Your income is only a resource if you are not spending all of it. If you are spending all of it, your strategy is the “Do Nothing Plan”. The more you can save of it and allocate it towards accumulation of assets the faster you get to your destination. Your other resource is time. If you use all your free time watching TV or going to the bar, don’t expect to miraculously wake up one day and college fees has been paid or your dream house bought. You may have a skill that you are sitting on that could be used to generate extra income over the weekends. One of the attendees of our course realised he could paint. He had always assumed this is something he would do only if he quit his job. Well, he has started making use of his weekends and his paintings are generating Kes 10,000 per month. That’s a resource; that’s the ticket to South Africa; that will enable him to buy assets. Kes 120,000 per year is land in some areas!

In summary, a Personal Financial Plan has specific actions. It does not wait for the perfect time to learn about investments, to earn the right amount of money to be able to save, the right job etc. You know are signed up for the “Do Nothing Plan” when you a still waiting for a right time or right amount of money to do it. Transform it into an actual Personal Financial Plan.

Waceke runs a program on personal financial management. Find her at waceke@centonomy.com|

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Questions
The article on what Kes 5,000 can do was very enlightening. I did not know I could buy shares with this amount of money. How would I start if I wanted to invest?
You need to open an account with a stock broker called a CDS (Central Depository Settlement) account. With that you can then buy and sell shares through the stock broker. Shares are long term investments. A good stock broker these days will be able to provide you with research on various companies. You can start by looking at the sectors of the economy that are growing and then do further research on the individual shares that are in those sectors. Always ask yourself when you are buying a share, why you think someone else in the future will pay more for it when you sell it.