The concept of financially secure is not a difficult one as some people may assume. It basically requires a little bit of financial planning, defining money goals and financial literacy. We are never taught how to take control of our finances as we are taught other subjects in school. Money matters are not taught at home either, therefore, when we land into our adult life, money matters become complicated.
If you’ve answered yes to any of these questions, you may want to go through the ten key steps on how to reach your financial goals and plan your finances:
- You’re in debt and are having difficulty getting out of it
- You don’t have a rainy-day fund yet, even though you keep thinking about one
- You have been planning on one or more major expenses like a house or a car but don’t know how to save up for them
- Every month when you get your salary, you think about taking some out to save, but every last penny gets spent
- You’re having a hard time trying to track where your money is going
If you just nodded to any one or more of the above, the following ten steps are for you:
Create a Plan
While it may sound easy, creating a financial plan becomes complicated very quickly. As part of the first step towards financial literacy and planning, decide on the amount of money that can be saved from earnings like your salary. After that, write down the amount of expenses and their timelines. This will give you a good visual representation of what expenses you must pay for and when, along with when you’re going to receive any earnings.
Evaluate Your Debt And Make a Payment Plan
The worst part of having a loan or a credit card is trying to figure out how to pay it back. As a rule of thumb, installment on a loan, or payment towards a credit card bill, should not exceed more than 20% of salary or income for the month. In case you do have a loan that is going beyond your means, consider paying off the loans first. This includes putting a hold on savings. It also means cutting down on as many expenses as you can to pay off your loans and credit card bills. This always helps in determining how soon you can start saving!
How Much Do You Need to Save
A great rule for savings is the 50:30:20 rule. This means that 50% of your income goes towards paying of your expenses. Then 30% goes into your savings, and then 20% on socializing, travel and spending on other items. In this case, bring out your plan you created initially, and evaluate how much you’re spending. If you’re spending more than this you might want to reevaluate your expenses. If you haven’t been saving according to this rule, you may want to start doing that now.
Start Planning Your Retirement
As a next step, start considering planning for your retirement. Retirement planning may sound a little premature but start thinking about it the minute you start earning and you can build a great safety net for yourself for when you retire.
Consider evaluating some key points for retirement planning, including, how much can you put in a retirement fund (for example: PKR 15,000), when you intend to start investing in the retirement fund (for example: when you’re 30 years old), and what kind of fund you intend to invest in (say, a voluntary pension fund that gives you reasonable returns).
Let’s take an example of why you investment in a retirement fund can be beneficial: Suppose you are able to make a PKR 15,000 today towards your retirement fund, and you are 30 years old. As a first step of setting up your retirement fund, you will be asked by the fund manager or investment professional to choose an allocation you wish to assign to your portfolio. This simply means how much of your monthly/annual contribution you would like to go towards stocks, bonds, [i]money market instruments or commodities. Since you are young with ample time till retirement the most likely advice you will get is to assign more of your money towards stocks and bonds, as opposed to the money market.
Assuming you don’t follow this advice because you are kind of weary but inquisitive, and you end up choosing an allocation scheme with medium volatility with 35% of your contribution going towards stocks, the remaining 45% going towards bonds, and 20% going towards cash/or cash equivalents such as short term government papers known as treasury bills – you can [ii]assume an average return of 14.00% – 17.50%. If you were able to consistently generate a return within this range you could expect to achieve the following amount in your retirement fund (see the illustration below)
Contribute towards a Good Insurance Plan
While you’re earning for yourself and your family for today’s expenses, it does feel that most of the time you have to invest and save and invest some more. However, this will help you to secure a better future for yourself and your family. A thorough research into these factors should be considered before investing in an insurance plan: what is your key reason for an insurance plan, how much you can afford in terms of premium payment to your plan, time duration for the plan and who the beneficiaries of the plan are going to be.
There are several insurance companies available in Pakistan. Some key insurance coverages that you could look into include medical coverage and life insurance, among other insurance plans. Always look out for caveats that can restrict you from filing any particular claim. These can include, for life and health coverage, age restrictions, types of illnesses, previous and family history of illnesses and diseases, coverage caveats such as restriction on certain tests, and even coverage range of hospitals.
Contribution towards a good insurance plan means that it can save you from unforeseen expenses. This also means that your investments and savings won’t get hit in such an unforeseen situation such as a hospitalization or other life altering situations.
Maintain Good Credit History
Good credit history should be your next step. Good credit history will give you tremendous benefits. If you’ve been under debt, start considering clearing out your debt right now. This will also help you to clear out your credit history. All banks are expected to report any overdues on credit card payments and other loans, against the CNIC or NTN number to State Bank, at the beginning of each month. This means that whenever you apply for a loan (say for a car or a house, or even an education loan for your child), your credit history report (known as eCIB) is checked. If you have missed payments or are overdue during any month or months in the year that you are applying, or you have debt ratio which exceeds 50% of your monthly income, the bank won’t approve your loan, credit.
You can start with making a list of all your loans and the payments you need to make. List down the overdue payments and overdue credit cards. Clear out overdue payments first. It will help you to cut down on late payment charges and interest as well. If you think that you can continue to go with minimum payments and still continue to take funds out to put in your savings, you’re making a mistake. The annual rate of interest on your credit card overdue payment is far more than the rate on your savings regardless of whichever investment option you go with (equity, money market, etc.). For example, credit cards in Pakistan can have annual interest rates that go up to 42%, and a late payment fee. Therefore, clear out your debts first and foremost, and then start saving.
Avoid Impulsive Expenses
It often happens that the minute we start earning, we want to start spending too. Because a regular income gives us the taste of freedom to make choices about where we would like to spend our money. However, avoiding impulsive shopping can help to plan out your expenses better. Financially, evaluate your spending patterns and identify the key areas where your money is worth. The initial plan that you created in the beginning would help you identify the primary areas where money needs to be spent. If you have been following the 50:30:20 rule, you should have funds to be able to spend on luxuries and impulsive items too!
Learn About Investment Options
While you’ve made your budget, plan out how you would pay off your debts, and even started thinking about retirement funds, it is important to learn more about all the investment options available in the Pakistani financial market. Stock market, money market, mutual funds and banks, all provide you with a ton of options, all with different risk and return profiles. Learn more about these options. For mutual funds, explore the kind of funds available, the kind of fees they charge, the returns they provide, and the areas where they invest in – which indicates their risk profile. Before you invest in the stock market, evaluate the kind of stocks that are risky, those that are not, the kind of fundamentals these stocks have, and how they have shown returns in the past. You can find several investment and securities companies who will assign you an advisor or account executive, who will guide you on the kind of stocks that you could potentially invest in. These companies also have research reports that they publish regularly, for which you can sign up to evaluate trends on your own.
Build A Rainy-day Fund
While it is easy to start planning and assigning your savings into your investment portfolio, it is also important to keep a rainy-day fund. A rainy-day fund is your chunk of change that you can have readily available when an emergency strikes. If all your funds are blocked in long term investments or insurance plans, and there is an emergency where funds are needed quickly, you would be at a loss. Emergency funds or a rainy-day fund is something that you should have on hand or would be able to liquidate quickly to manage your emergency, like a serious medical condition or a loss of job. A general rule of thumb recommended is to go by the 3-6-9 rule. If you have multiple earning streams in the house (like multiple people earning in the household), then a three-month living expense should be covered. If you’re the only earner, then a 6-month living expense should be covered. If you are someone with irregular income or close to retiring, then a 9-month living expense should be covered by your emergency fund.
Be Ready to Make a Change
Before being financially literate, you would need to promise yourself to be financially responsible. That means making changes towards budgeting, planning, and evaluating expenses regularly. It also means designing your investment portfolio, managing your funds, and maintaining and following your own financial plan.
You can learn a lot about portfolio management, insurance plans and mutual funds on our blog. To know more, check out our posts here.
[i] These are cash/cash equivalents such as cash at bank in high yield accounts and treasury bills
[ii] This is calculated as the weighted average of all the retirement fund returns across different asset classes i.e. Money market, Bonds/Fixed Income, and Stocks at the medium volatility allocation ie. 20%, 45%, and 35% respectively. Please note that the returns used are for the last 365 days and past performance is not necessarily an indicator of future outcomes. The example is only used to illustrate the value of planning for one’s through Voluntary Pension Schemes.
 These are cash/cash equivalents such as cash at bank in high yield accounts and treasury bills
 This is calculated as the weighted average of all the retirement fund returns across different asset classes i.e. Money market, Bonds/Fixed Income, and Stocks at the medium volatility allocation ie. 20%, 45%, and 35% respectively. Please note that the returns used are for the last 365 days and past performance is not necessarily an indicator of future outcomes. The example is only used to illustrate the value of planning for one’s through Voluntary Pension Schemes.