Financial Planning

What and Why Financial Planning

According to Financial Planning Standards Board Indonesia (FPSB Indonesia), financial planning is a process to achieve one’s financial goals through integrated and planned financial management. Financial goals include buying a house, preparing your children’s education, preparing retirement fund, etc.

The main reason why financial planning is important is because one’s needs and wants are unlimited but his/her productivity age is! Have you ever wanted to buy something but you don’t have the money for it but you are determined to save for it? While you are saving, there could be unpredictable expenses that can slow down your plan to buy that thing. Finally, you can save and buy that thing. How did you fell what you succeeded? Congratulations! You just finished a simple financial planning.

In reality, one’s financial cycle is not that simple. Many things must be planned for and integrated. The birth of a child definitely brings joy to the family but at the same time adds financial burden that must be well-planned. The same goes with the second child and so on. A sudden sickness in the family can change that plan so it must be anticipated accordingly. What about the sudden death of the father? This will certainly change the financial condition drastically. On the other hand, if one or both of the parents live longer pass the retirement age so that their expenses are high but the income is low or even non-existent, the child must take the extra responsibility, too. And this will lead to what is often called a Sandwich Generation, that is a productive generation that bears the burdens of both future generation (children) and past generation (parents, in-laws, etc.)


Sandwich Generation

The term ‘Sandwich Generation’ was first introduced in 1981 by Dorothy Miller and Elaine Brody. Like a sandwich where there are two slices of bread that squeeze a piece of meat in the middle, the Sandwich Generation is a generation still within the productive age who bears the burden of three generations, i.e. oneself (like the meat as the source of the productive income), the future generation as the children and the previous generation as the parents, including in-laws, grandparents and others (like two slices of bread above and below.)

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The 5 Stages of Financial Planning

Financial planning is a process whene you make several financial decisions to achieve your family’s and your personal financial goals. The process of financial planning never stops because as long as we live, we still need money. There are 5 stages in financial planning.

ASSESSMENT

In this first stage, we will do a complete assessment of your financial data, like income, expenses, family budget, assets and loans.

FINANCIAL GOALS IDENTIFICATION

Then we will help you identify the financial goals that you want to achieve, like passive income, children education, retirement, and inheritance.

STRATEGY ALIGNMENT

In this stage, we will help you make and align the strategies with your financial goals and dreams, such as budgeting, investment, saving and asset allocation.

RISK MANAGEMENT

Life has many risks. If any of the risk happens, it will certainly change your financial planning significantly. In this stage, we will help you do risk management, specifically with insurance, such as: health insurance, property insurance, critical illness, education and life insurance.

PERIODIC REVIEW

We recommend and guide you to conduct a periodic review, be it monthly, semi-annually, or annually. In addition, you also need to do review together with us on certain important milestones in your life, such as marriage, birth of a child, children entering college, risks in the family and others that can affect your financial plan.


Inflation

The arch enemy of money is inflation because it reduces the purchasing power of money. With 150 rupiahs you could buy a liter of gasoline in 1980. In the 1990s, you needed 550 - 1000 rupiahs to buy the same 1 liter of gasoline and in 2022, it will cost 10,000 rupiahs per liter. This is inflation. We cannot avoid it, but we can plan for it. One way is by looking for investment instruments that provide higher returns than the inflation rate..

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Compounding Interest

If inflation is the arch enemy of money, then the vitamin for money to grow is called compounding interest. Compounding interest is where you invest the interest yield on your original investment back, thus helping to deliver faster and bigger returns. The scientist Einstein himself stated that compound interest is the eighth wonder of the world!.

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Risk & Reward

High risk, high gain. Is this statement true? Not necessarily! Risk is just volatility. A high-risk investment does not necessarily yield back high returns. But an investor will expect a higher return from an investment with a higher risk as an additional 'premium' of that risk..

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The Benefits of Financial Planning

According to Dr. Sanjay Tolani, there are 3 benefits of doing financial planning:

Peace of Mind for the Future

Who among us is never a bit worried about our future especially about retirement? How can you be sure that your retirement is covered financially? Financial planning becomes very important in helping you so when entering retirement, your money is enough to cover your the life style that you want. You can retire comfortably after many years of hard work.

Financial Independence

At the age of 55, will you choose to keep on working because you need the money or to have enough income source to support you so that you can enjoy your precious time with your lovely family? If you choose to become financial independence, than you need financial planning now!

Early Retirement

Although many people wish to retire at the age of 55, in reality more people need to work pass 60 years old. Who doesn’t wish for early retirement? The earlier a good financial plan is made the sooner this can happen. And with the power of compounding interest, your financial plan can most likely help you reach early retirement.