#BTColumn – Financial planning is for all of us

Disclaimer: The views and opinions expressed by the author(s) do not represent the official position of Barbados TODAY.

By Sonia Hunte

As we enter the world, financial decisions are made for us.

As we mature, we take over. Some of us are “totally unprepared”, “some partially prepared” and some “fully prepared”.  Based on empirical data, the majority appear to fall into the first category of “totally unprepared”.  This is borne out by the recent headline in Barbados TODAY that indicated that the Supervisor of Insolvency during the pre-Budget ministry presentations said Barbadians were drowning in debt. She came to this conclusion based on her analysis that, “We are seeing people as young as 23 and up to the age of 72 suffering with severe debt problems. We are seeing people with eight credit cards, using one credit card to pay the other. We are seeing businesses which start out, but because of a lack of awareness of what is out there, they are getting themselves into financial trouble.”

Secondly, we are being invited to subscribe to government financial instruments which offer a promised higher rate of return than current savings instruments. Special Advisor to the Government, Dr Kevin Greenidge, described them as a good savings option.

Thirdly, during the recent review of the National Insurance Scheme (NIS), the Consultant Actuary, Derek Osbourne, stated that it needs reform to ensure it is not depleted in another 12 to 20 years.

Lastly, we have the President of the General Insurance Association of Barbados, Randy Graham, addressing concerns on the absence of insurance on some properties and inadequate coverage on others.

What do all these things have in common? If you said money, you are partially correct, but the answer I am looking for is financial planning and decision-making.

The Financial Planning Board of Canada defines financial planning as “a disciplined, multi-step process of assessing a client’s current financial and personal circumstances against the future desired state; and developing strategies that help the client meet his/her personal goals, needs and priorities in a way that aims to optimize the allocation of their resources”. Personal financial planning can therefore be a comprehensive plan which encompasses all areas of financial planning and is used to mitigate risk to the challenges of life. Alternately, it can address all/ some of the following six main areas based on an individual’s needs at a given point in time.

October is recognized as Financial Planning month; therefore, we bring you a series of articles addressing key areas of a financial plan as follows:

• Cash flow- management -income-less expenses, excess funds to invest

• Insurance /risk management -health, life, disability, property

• Investment planning -management of risk vs reward

• Tax planning -reducing taxes to a minimum through legal means

• Retirement planning-creating an income flow when employment ceases

• Estate /gift planning/distribution of assets.

To create a financial plan, a Certified Financial Planner (CFP®) professional must start by collecting and analyzing information on such areas as age, marital status dependents, attitudes, expectations, current earnings, assets, liabilities, cash flow and risk tolerance.  The outcome of this analysis is a net worth and cash flow statement which gives the advisor an insight into the client’s ability to withstand risk, during the development of a financial plan.

Step 2 – involves the creation of goals: retire at 55, plan for risk if the main breadwinner dies prematurely, create an educational plan for children, travel, buy a rental property, leave a gift for church, school, charity.

Goals can be divided into three sections – short, medium and long.   A short -term goals could be paying off a credit card/creating an emergency fund; a medium term could be creating an investment portfolio; while medium /long term goals can be saving for a house and or creating a retirement plan.

Step 3 – Analysis of the course of action to achieve the goals set in step 2 occurs at this stage. This looks at what is currently being done and what should be done to achieve the desired goals, with advantages and disadvantages of each action.

Step 4 – based on step 2 – the professional must consider the priority, assumptions and estimates for each recommendation, and the independence or interdependence of each. For example, the professional may recommend an attorney who specializes in estate planning, an insurance professional for risk protection, a mortgage/real estate professional for home/real estate and an investment management firm for the investment portfolio. These activities are coordinated in association with the professional.

Step 5 – involves the presentation of the plan preferably in an interactive meeting, where the client supplies feedback.

Step 6 – involves assisting the client in implementing the agreed upon plans set out and assigns responsibilities between the client and the professional. Products and services are analysed to decide which one best meets the needs of the client, by the professional in conjunction with the client and team.

Once the plan is set, the client meets with the professional at set intervals to adjust recommendations as they work towards their goals.

Step 7- based on the engagement letter, the professional or the client can share responsibilities for the monitoring and updating responsibilities.  This step is based on qualitative and quantitative reports and benchmarks.

Who is financial planning for? Anyone who wants to achieve financial independence. It can start with a financial checkup and progress to a specific section (cash flow management) or a comprehensive plan.

You need a financial plan.  We help you look at where you are and where you want to be.

Sonia Hunte is a CFP professional (Certified Financial Planner, Canada)