Personal Financial Plan

27 May 2019

What is a financial plan – a balance statement of life?

What is financial planning? Articles of this nature usually start with an introduction along the lines of “The definition of a personal financial plan is not a generic one, but rather a comprehensive description of the management of an individual’s wealth and financial decisions”. Boring, right? We agree. But don’t worry, financial planning can – and should – be fun.

What is a financial plan?

This is where you’re going to plot your life’s financial dream and goals – it’s where you can visualise and dream about that big holiday five years from now, or the future of your children. Your financial plan is the backbone of every financial decision and dream you may have – now and in the future. Your financial goals will vary regularly, so remember that life does not start at retirement.

The benefits of having a well-balanced financial plan

Financial success is gained through two key actions: hard work and sound financial decision-making. We can all burn the midnight oil, but it is the second key action that determines whether you will be able to reap the benefits of a sound financial plan, which:

How do you create a financial plan?

1.  Set financial goals

It is important to have goals in life – it is not sustainable to do things without reason or direction. However, the reality is that most of our planned goals require money and some hard-fought discipline.

Having said that, financial goals allow you to focus on why you are doing something. We can categorise our financial goals into three categories:

a.       Short-term goals (less than five years)

b.      Medium-term goals (five to ten years)

c.       Long-term goals (more than ten years)

However, the mistake you should not make is to put all financial goals into the category of investments. Other non-investment-related goals may include:

  • Getting rid of debt, which is most likely a high-priority goal for most of us.
  • Risk planning in case of sickness, death and disability – to be able to face off the financial difficulties in such times.
  • Creating an effective budget.

These goals are interlinked – an efficient budget releases previously underutilised capital for investment purposes or to cover risk.     

2.  Discover where your money is going

The next step is to create a realistic budget. How? There are a few easy steps to get started.

a.       Budget

When you set up a budget you will get a very clear picture of how much money you earn, how you spend it and how much is left over, if any. This balance can be used to fund your financial goals and dreams. Here are some more tips on how to create an effective budget.

b.      Cutting expenses

The budget allows us to identify how we spend our money and where it is possible to save. Perhaps it is not necessary to skip that morning coffee ritual at Mugg&Bean, but maybe eating out once a week is an ill-afforded luxury. Part of the discovery of the budget exercise is to face the harsh reality of the dent debt makes in our cash flow situation. ‘Needs’ and ‘wants’ are not the same.

3.  Get rid of toxic debt

As far as expenses in your budget go, there is a huge difference between a food bill and debt repayment. We can all cut down on what we eat and where we buy our food, but the instalment of the personal loan we must pay monthly is a given. Hopefully, your debt had a very relevant purpose initially, but repaying it at a high interest rate makes an ugly dent in a monthly budget. The instalment can rather be used to fund financial goals and dreams. Typically, the “get out of debt jail” plan will look something like this:

  • Make a list of all your debt as identified in the budget exercise.
  • Rank these debts in terms of the highest to the lowest interest payable.
  • Find the extra money to repay these loans as quickly as possible by cutting other expenses.
  • Focus on one debt at a time, focusing first on those with the highest interest rates.

Build up your savings by having an emergency fund available for the next time you face some unexpected nasty financial surprise.

4.  Prepare for the uncertainties of life

Let’s call this risk management. The different risks and uncertainties that you may face and the strategies that you may use to protect yourself against such risks will change as your personal financial circumstances change. This is directly linked to where we are in our financial lifecycles.

For example, during our early earning years many financial commitments will appear one after the other: a vehicle loan, rent and then potentially children or the likes of a mortgage, combined with relatively few financial assets. Premature death and disability are key risks to our goals, so we look at life and disability insurance to offset those risks. Then, approaching the silver years of our lives, we tend to have fewer financial commitments and less reliance on earned income but more financial assets and cash flow from pension provisions.

You can deal with risk management in two easy steps:

First, the cause of the risk should be identified. Untimely death, for example, could leave your family to cope with lack of income to pay debts and daily expenses. Imagine you are the primary breadwinner, or even worse, the sole breadwinner in such a scenario.

Determine how much of this risk you are willing to retain yourself. The real risk could be financial Armageddon for those that you leave behind in the event of premature death. This is where life insurance becomes a critical tool in your financial plan: it gives you the opportunity to transfer the risk to the life insurance company, because if you are the average person on the street, you simply cannot afford to tackle this financial risk on your own.

5.  Start saving

This is self-explanatory: you have identified your goals, used your budget to determine and free up excess funds by getting rid of debt and managing your expenses, and covered your risks as best as possible. Now the only thing left is to do is invest your surplus funds to reach your financial goals and dreams!

6.  Maintain your financial plan and life stages

You faithfully take your car for the 15 000 km interval service and visit the dentist every six months. Why not also pay attention to your financial plan by regularly reviewing and monitoring it? Life is full of moments and uncertainties, and every stage has its own challenges and risks. If one of the below scenarios became a reality in your life, what would the impact on your financial plan be?

Retrenchment - You immediately lose the revenue stream which represents the cash inflow in your budget. Do you have the necessary emergency funds to keep you financially going for a while?

Increases in salary or a bonus - It is the ideal opportunity to relook the budget and not necessarily to see if you can afford that expensive new car! Can you pay off debt faster or are there other short-term goals or risks that need attention?

Death - Plan as you may, in most cases death is unexpected or difficult to plan for. In the event of your untimely demise, updated wills, guardians for minors, estate costs, etc. will be crucial.

Divorce - It remains a reality in our society and it may have a huge impact on your financial plan, which may need to be rewritten.

Inheritance - If you inherit a large sum of money, how will this impact your financial plan? How will you incorporate these assets and wealth in your existing plan?

Children - Whether planned or not, children represent a great financial commitment. Does your financial plan consider their wellbeing, education, hobbies and the like?

Of course, you may attempt to do this on your own, and rightfully so. But sooner or later, it may dawn on you that a financial plan is not necessarily the simple DIY process you thought it would be.

7.  The role of a financial adviser or broker

When it comes to implementing and managing a financial plan, it is one thing to receive advice from friends and family but another to task someone with professionally managing your financial plan.

The complex world of investment and financial planning, which is the foundation of your financial plan, deserves the necessary expertise of a trusted financial adviser, and Absa is ready to help you broaden your financial perspective.

To start a conversation around your own financial plan, you can email us at, or call 011 225 1797.

Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.