Is to win, of course
The purpose of financial planning is to reach your financial goals
- So you need to know what your financial goals are
- You also need to make an effective plan to reach them
- And you need to implement your plan
Those three points encompass a huge amount of detail. Figuring out your financial goals requires you to look at your current spending, at your future plans, and work out exactly what it is you want or need.
In order to make a plan you need to know about your options and choose the most suitable ones.
To implement the plan you need to understand yourself and how to motivate yourself to keep going until you reach your goal.
As an example, here is my current thinking on the three points.
My financial goal is to have enough passive income to support myself and my family. I currently estimate this as 3 million yen a year for survival, 4 million for a comfortable life, and 5 million or more for a luxurious life.
My plan is to invest in a mixture of index funds and dividend shares until the dividends reach my goal. I do not plan to ever sell any of my holdings. This is probably not the most effective strategy, but it is very simple and should prevent me from making mistakes like trading too much.
To implement my plan I will try to earn more by doing interesting freelance work and control spending by keeping my financial goals in mind. I will invest regularly (monthly for my wife and biannually for myself). I will keep reading about personal finance and investing.
When doing the numbers for my plan I deliberately use low estimates for growth and yield. I am working off 4% a year growth and 3% yield. I hope to be pleasantly surprised (historical growth is more like 9% and my dividend shares yield around 4%) but aiming low includes a margin of safety and I'd rather have more than I planned for than less.
I haven't included my Japanese pension in the above plan as I have no control over it. I expect I will receive something, but I don't plan on relying on it. Anything I get will be a(nother) pleasant surprise.
How about you? What does your financial plan look like?