There are a few “simple financial manoeuvres” to help an individual save enough to live through retirement and have a comfortable lifestyle in their twilight years. Below are a few example of these “simple financial manoeuvres” an individual can incorporate into their financial planning process.
1. Budgeting
Budgeting is one of the most important financial manoeuvres that could be carried out by an individual. By having budgets, an individual can monitor their financial standings and are able to have control over their financial condition which would help them through retirement and beyond. This is due to the fact that developing and implementing budgets is one of the step in the financial planning process. Budgeting could be done by developing personal financial statements which would allow one to know their financial standings and subsequently provide them with a sense of financial security. The purpose for having a personal financial statements is it would help one to evaluate one's financial being, identify financial obstacles and help them in making better informed financial decisions. An individual might face sudden economic downturn or an increase in household size and consumption, they could change and adapt new financial goals based on the results from their financial statements. All these purposes also coincides with the two financial planning process of using financial statements to evaluate results, redefine goals and revise plans as situations change. There are two types of financial statements which are balance sheet and the income and expense statement.
Balance Sheet (Refer to appendix for example)
It is a statement that outlines one's financial position or net worth at a point in time. Balance sheet consists of statements of one's assets and liabilities. An individual's net worth is derived from liabilities being deducted from the assets. Assets are things that an individual owns which consists liquid assets and investment assets. Liabilities are money that an individual owe to another individual or any financial institutions such as current liabilities and long-term liabilities. To ensure an individual is able to live through retirement, one should ensure that their net worth is on the positive side and there is adequate assets to cover their financial responsibilities to avoid financial insolvency.
Income and expense statement (Refer to appendix for example)
It is a statement that outlines an individual's financial performance through various financial activities that is either received or payed out in a given period of time. An individual's income may include wages or salaries, bonuses or any other activities that involves cash being received by the individual. Expenses on the other hand may include fixed or variable expenses such as rent, mortgage payment, food, entertainment or any other activities that involves cash being spent by the individual. The total income should exceed the total expense to produce a cash surplus. An individual is able to ensure that they are able to live comfortably through retirement if they are able to maintain the availability of cash surplus. This is because maintaining cash surplus consistently would also increase one's net worth.
In conclusion, by developing and implementing these personal financial statements, one is able to monitor and control their budgets and cash flows and would in turn avoid their expenses to get out of control. If they are able to properly manage their budgets then they are more than likely to have large cash surplus or large net worth to live comfortably through retirement.
2. Assets acquisition planning
An individual spendings would almost certainly be largely spent on automobile and housing decisions. An impulsive or irrational decision on buying an automobile and housing would definitely affect an individual's financial goals to live through retirement. By developing and implementing this plan and strategy when acquiring an asset, an individual is able to adhere to the financial planning process of developing and implementing financial plans and strategies in order for them to live comfortably in their twilight years.
Automobile Decision
There are a few guidelines that one can follow in the process of buying an automobile. The main thing is that one should do research thoroughly before buying a car, such as what kind of car would accommodate one's needs. An individual should know how much can they afford to buy, operate and maintain the car based on his/her budget. For example, an individual who is a bachelor/bachelorette should buy a small-size car as a mid-size/ full-size car is more suitable for a family and it tends to more expensive. Also, one should consider trading in one's loan but should maintain the loan payment within 20% of their monthly income. Alternatives to buying a new car includes buying a second hand car or leasing a car. These method is more suitable for an individual who are not yet financially stable since buying a second hand car or leasing a car would be a cheaper alternative to buying a brand new car. An individual is also usually offered a lower monthly payments and lower down payment when they lease a car.
Housing Decision
An individual will most definitely need a place of accommodation and buying a house wisely based on one's needs will benefit one in achieving their respective financial goals. Someone who lives alone and without any financial responsibilities towards other family member should opt for the rental unit. Rental unit doesn't require a large amount of down payment from the lessee. An individual with family would rather be more comfortable in a single family home or condominium which are generally cheaper then single family homes. Owning a house could help one hedge against inflation as the value of a house would increase along with inflation if such situation arises. Lastly, before buying or renting a house, one should do research and analysis as to wether one should buy or rent a home. (Refer to appendix for Rent or Buy Analysis)
In conclusion, an individual's net worth or wealth are so often diminished or demolished due to unplanned and uncontrolled spending. So, living by one's means and not giving in to the urge of spending impulsively or unnecessarily when acquiring assets would help one to save more for retirement.
3. Liability or debt planning
An individual usually rack up debts by over-spending on credit cards so managing one's consumer credit is important as it could have an effect on an individual's financial goals attainment and cash budgets. Credits are useful when it comes to avoiding paying a large lump sum amount of cash for an asset, meet financial emergencies and lastly for the convenience of using a credit card. But, there are improper uses of credit such as impulsive purchases, or using it to meet basic living expenses and purchasing non-durable goods. One good rule of thumb to follow is that the product purchased using credit should outlive the credit payment. A few ways for an individual to manage their credits efficiently is by having credit reports and scheduling payments accordingly to its priority. Credits with the highest finance charges or interest rate should be given priority as they would cost the most money if delayed. Also, one is advised to make payment on due date to avoid late payment penalty and finance charges. An individual should also keep a list of all debts because they can use it to check their debt safety ratio so that they could ensure that they are in a strong credit position. Lastly, the best way to manage credits is to have discipline when it comes to using credits and reduce the number of credit cards owned by an individual. In conclusion, by keeping track of one's debts and liabilities, they are able to maintain the amount of debt and the debt repayment burden within their respective budget. This method also coincides with the steps within the financial planning process which is implementing the budget and evaluating the results. If an individual is able to manage their debt and liabilities well then they would not have to incur more unnecessary expenses and are able to save extra cash for retirement.
4. Savings Planning
In order to achieve our financial goals, we can do a simple financial manoeuvres such as savings planning. A savings plan is the process of determining savings goals and the actions and decisions needed to achieve them. Savings plans include identifying sources of income, estimating expenses, implementing savings plans, and managing assets. Estimating future cash flows will determine whether to achieve savings targets. Due to the inflation in future, we must do some planning to avoid the inflation when we are retired. So that we can protect ourselves from the inflation. When we do planning, we also need to consider about family size, type of pension and how much money will get when retire. It is vital for our financial well-being. There are some pitfall in savings planning such as some people are starting too late to do their savings planning due to pressing financial problems such as buying a house, borrow loan and child care. They will think the savings planning is not important for them and they will use their money to spend on other place first. They won’t think about future and plan for it. When they are close to retire, they just start to worry and do their savings planning. If we can start to do our savings planning early, we can have a better life in future. Example we can put the fixed deposit in bank when we are young. Besides that, some people are putting their money in savings plan away too little. Example, they take 90% of their salary to spend and 10% for saving. They rather to spend for today than save for tomorrow. So that is not enough for future when we are retired. The better way is if we can put more money into saving plan, this will help us when we are in emergency and we can use the savings money to solve the emergency problems. Other than this, they invest too conservatively like they place too much into the low yielding, fixed income securities and so on. Because they scare when they invest in the high return investment, the risk will be higher and they will face huge losses. More return more risk. So in the long run, to be over cautious will be more expensive. In conclusion, we must choose a stable investment and make a portfolio of investment. A stable and high return investment will help us in future and give us financial freedom. People also always ignore higher health care costs. One of the most overlooked areas of savings planning is the estimation of post-retirement health care costs and their inclusion in income needs. In addition to normal living expenses, medical expenses are a huge expense. Unlike holidays, hobbies and entertainment expenses, medical expenses are not discretionary. When you are sick or injured, you need to get a treatment. In Malaysia, medical expenses are growing at a rate of 10% to 15% per year, and treatment for diseases and injuries usually caused by elderly patients is not cheap. Therefore, having sufficient reserves and good health insurance may be the difference between a comfortable retirement and a challenging person. Don't wait until you get sick to get health insurance. It is also cheaper to get medical insurance from an early age. Lastly, many people also make a mistake that they no keep updating their savings plan. When you are from life to retirement, you will experience different activities at different stages of life at age 20, 30, 40 or 50. These life events will affect your income and expenses, so you must revisit your savings plan every few years to take this into account. If your last savings plan was completed five years ago, your promotion and your father need care before your child is born, and your retirement may be based on a lifestyle that is no longer relevant. You should revisit your plan every three to five years, or as your life changes with your marriage or children, so you can adjust accordingly. By making these adjustments often, you will maintain a normal retirement track. There are many people have made the same mistakes in not taking retirement plans seriously. They may spend more time and interest planning and researching vacations, buying new homes or funding their children's education. However, they said there are three things in life that you can't avoid like taxes, death and retirement. Therefore, we must do savings planning early.
5. Investment Planning
We also can do the investment planning. An investment planning is the process of matching your financial goals and objectives to financial resources. When you do investment planning, we must be very clear on the financial goals and objectives. Because it will help you to identify how to match your financial resources to your financial goals. There are many different types of investment. The most commonly investment is mutual funds, stocks and real estate. There are 5 steps in making investment planning. Firstly, you must assess your current situation. You must know how much you want to invest and do a budgeting to evaluate your monthly income after deduct all the expenses. Secondly set a goal for yourself. You must know what do you want, how much do you hope to earn and how long you need to take to achieve your goals. Thirdly determine your risk tolerance. You need to decide how much risk you are willing to take and choose either you want to become a risk adverse investor or risk taking investor. Fourthly decide what to invest. You may choose put fixed deposit into bank or invest in real estate. But most people like to invest in mutual funds. Last step is monitor your investment. You must keep on track on your investment and know how the investment are performing. These 5 steps can help us easily to manage out investment planning. There are few disadvantages of no making the investment planning. If you did not do the investment planning for backup in future, you may reach your retirement age with little money in bank. In that time, your life will become more difficult. Besides that, you will drown in debt instead of planning for the future. You may suffer the financial problems like cannot pay the credit loan from bank. Other than this, investment is a passive income for us. If we only get the little salary and no do some investment, then we will work until die. For example, we can invest in mutual funds. Mutual funds are a financial services organization that receives money from the investor and invest those funds on their behalf in a diversified portfolio of securities. It is professionally managed portfolio by an investment company. It’s return and risk depends on portfolio. There are many types of mutual funds that we can invest such as growth fund, balanced fund and growth-and -income fund. The services provided by the mutual funds are very comfortably which are automatic reinvestment plan and systematic withdrawal plan. Automatic reinvestment plan is very convenience for those who do not know how to run the investment. It is deal with the dividends and other distributions the funds pay to the shareholders reinvested in additional fund shares. Systematic withdrawal plan is to allow shareholders to be paid specified amount of money each period. In addition to mutual funds, we also can invest in real estate because the returns are high. It offers more diversification than holding stocks and bonds because it exhibits less volatility and does not synchronize with stocks. In the forms of real estate, we can either buy property directly or invest in REITs. There are 3 types of REITs. Property REITs invest in shopping centers, hotels, apartments and other real estate. Mortgage REITs invest in mortgages. Hybrid REITs invest in both properties and mortgages. Besides that, we also can learn how to do trading in forex market and stock market. Many people like to trade in these market because it is high return. It is also one way for us to do our investment planning. In conclusion, investment planning is very important for because it will help to achieve our goals and give us financial freedom.