Failing to plan is planning to Fail

4/4/2008 1:49:26 PM

When we want to build a house we go through a lot of planning. Designing the type of house we want, what the layout should be, how big it should be, which rooms should face north and of course after all this what the house is going to cost. This is critical since building a house is most probably the biggest investment most people will make in their life time. If you don’t do this chances are that the building project will be a disaster and the costs will run away and may lead to financial ruin. Yet when it comes to our financial well being and future we very seldom take the time to first plan and secondly manage our financial destiny.

It is interesting to see how few people set themselves objectives and then focus on achieving those objectives. There is a saying in the business planning environment that states “if you aim at nothing you will achieve it every time”. The same argument applies to our financial future. Every individual household should have a financial plan which serves as a roadmap to specific financial destinations. This plan should then regularly be revisited to see if you are still on track and whether changes should be made. This document helps a household to manage their finances and whenever a decision is to be made that has a financial implication, the plan can be revisited to see whether the decision fits in with the plan or not and whether the decision will enhance or detract from achieving ones objectives.

So what are the key elements of such a financial plan? The next few editorials we will be looking at what should be in your plan and how such a plan should be developed. The first critical element in any plan is specifying what you want to achieve, these are called objectives.

Objectives

As a start one should set objectives of things you would want to do or buy at some future date. Keep in mind that financial planning and money in general is merely an instrument to help you do the things in life which you want to do. Money in itself is never an objective and having money should not be an objective either. For instance if you want to travel overseas in future the amount of money required to implement this objective is merely a resource, the objective is the overseas trip.

When setting objectives the academics tells us that there are some criteria that any well developed objective should consist of.

Let us set an example of an objective and then identify the key elements:

I want to take a two week vacation in Paris France July 2012

The key elements are:

The objective should be specific: This means that if you don’t specify exactly what it is to be achieved you will never know if you achieved it. For instance it is no use to say I want to travel one day. To be more specific you will say I want to visit Paris France.

Secondly the objective is linked to a specific time frame “July 2012”. This helps to measure whether we are on track to achieving the objective or not as well as help us set milestones on our road to measure and some times to change the objective if we see that we are not going to achieve the target.

Thirdly it is important that although the objective may be a stretch it must still be realistic. All objectives must have stretch. This means to achieve it, it is going to cost you something, effort, sacrifice etc. However, it is not of any use to say I want to buy a R15 million Jet by December 2012 if my earning potential for the next 4 years is R500 000 a year or something like that. I am not saying that such an objective is unachievable only that for a scenario as the one sketched the individual will have to put some serious strategies in place to achieve it.

You can see from this that no financial values have been specified and money is not even mentioned in the objective. The reason is money is merely a resource to help us achieve our life goals. Even if we were to have an objective regarding retirement we will not want to set the objective in terms of monetary values but rather in terms of the lifestyle we would want to have after retirement.

Next time we will look at the next element of the financial plan namely the strategy and action plans.

Take some time to think about your lifestyle objectives and maybe write them down on a peace of paper. Remember you can have short, medium and long term goals.

Till next time have some fun with this. It is time to dream.