Personal Financial Planning for 2019

When the Olusesi family gathers in Lagos on Christmas day to open gifts, there will be no handing over of parcels from Bode and Ibifuro Olusesi to their four grandchildren, who are in their early 20s and employed. Instead, the grandparents will be giving notes that say the grandchildren now have Retirement Savings Accounts worth N3,000,000 each.

Think of how large this compounded initial lump sum can become when the four young adults retire in 45 years.

The end of the year may represent a frenetic time, but building such deliberate financial moves into the remaining days of 2018 can pay off long-term, and provide greater peace of mind for the coming year.

Some of the following financial planning strategies also provide clarity for achieving financial security:

Review finances, define personal goals: Organise your financial affairs by taking stock of your assets and liabilities. Think about what you would like to save towards (children’s education, new home, car, family ceremonies, vacations, etc.), and consider how long and how much you will need to put aside in savings and investments in order to achieve that particular objective when the need arises. The biggest obstacle to an effective financial plan is debt.

Begin to budget: Go over your expenses for the past year so you can anticipate your future monthly spending. Staying within budget (and cutting back on impulsive spending) not only ensures that expenses are planned, but also helps achieve or surpass any savings goals.

Liquid cash reserves: Financial experts advise setting aside between 6 months and two years of living expenses in savings, for emergencies. The older you are and the higher your salary, the bigger your emergency fund should be. Once cash reserves are solid, the next natural step is to begin investing.

Investment portfolio: Set an asset allocation, and diversify based on your goals, objectives, and risk tolerance. Asset allocation is an investor’s most important decision, says William Bernstein, author of ‘The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between’.Research by numerous finance professors has shown that the vast majority of returns over time come from asset allocation rather than picking the right security or the right time to invest in the market. One rough rule of thumb Bernstein uses for setting a stock-bond allocation is that your age should equal your bond allocation. Asset allocation works best with occasional rebalancing, since not all assets move at the same rate or in the same direction

Insurance coverage: Ensuring you are adequately insured – life, health, disability, long-term care, and homeowner’s insurance – will help protect you and your loved ones from financial crisis.

Estate planning: Establishing a will, trust, and powers of attorney, and ensuring they reflect one’s current wishes and desires allows an individual decide exactly who will benefit from their estate, to what extent, and in an efficient manner (protection from taxes, for example).

Taking advantage of tax incentives: Whether as an employee or business owner, there are many tax incentives to be had. This can include anything from tax loss harvesting to offset company group liability (for businesses), to maximising pension fund contributions which lower annual income tax payable and serves as a tidy retirement nest egg (for employees).

Retirement: It may be ideal to start saving for retirement after the age of 28, but if that fails, there are plans for late starters or the self-employed. These can include Retirement Savings Accounts (RSAs), annuities, and insurance policies that guarantee returns before or at maturity of the policy or account.