Carrying out a financial need analysis by identifying your financial needs is the third fundamental step in the financial planning process. For many people, the most pressing needs are to have the available funds for home ownership, the tertiary education funding for their children, and for their very own retirement in that order.
Perhaps the first financial responsibility a newly married couple will has to undertake after leaving the safety nest of their parents homes, is in the planning for a new home. They will have to calculate their sources available – savings, fixed deposit, unit trust, stocks & shares, insurance, of their accounts before they were married and to calculate the amount comfortable to be set aside monthly. They will have to estimate the down payment required when identifying their dream home.
Every responsible parents wish to provide the best education for their children. They believe a good education will be an asset for life for their children, in helping them to get better paying jobs and in establishing financial security for their future. They also believed that higher education raises the personal status of their children.
College education costs are increasing faster than inflation. It is believed that college tuition costs are increasing at an average rate of 6% annually. Relying on study loans may be an option but if you don’t want to rely on study loans, then naturally enough, setting up a tertiary education fund is a must. The earlier you start, the easier it becomes. In view of this, financial planning for the education fund must start early as soon a child is born, for time is your greatest ally.
In planning for the education fund, you will need to identify the total savings time before your child attends college and to estimate the future education fees required. In additional to savings, an investment plan will need to be in place to overcome inflation and ever rising costs of education. Unexpected events do happen, hence, it is sensible to take precaution by including some life insurance with your investment so that your children’s education is guaranteed regardless.
The most pertinent worry among the retirees and those near retirement age will be if they will enough money to live on at retirement and 10 or 20 years thereafter, can they afford to maintain the lifestyle, enjoying their favorite sports, wine and dine with their loved ones, and to be able to travel and leisure after they’ve stopped working. In addition, increasing expenses may be incurred during retirement due to medical fees which will absorb the largest portion of their retirement savings. Other expenses during the retirement may include house renovation and repairs to the existing house, maintenance and repairs to an old car or in the worse scenario new car as replacement when the old faithful is beyond repair, and gifts to grandchildren.
It is estimated that to maintain your current lifestyle, you may need at least 80% of your last earned salary. The most damaging woes to a retiree however will be the rate of inflation, the most deadly money killer over time. At an inflation rate of 4%, it can be computed that if the current expenses is $50,000 per annum to day, this will balloon to $109,556 per annum in 20 years time, almost a two fold increase.
Besides these three most common financial needs, there may be other needs or desires. It is important to identify them. Only upon carrying out a financial needs analysis, will you be able to set up a financial planning strategy to meet your financial needs and objectives, taking into consideration your time horizon; savings plan, investment vehicles and investment planning to achieve the required rate of return of your investment.