The Purpose of Financial Planning

Is to win, of course

I’ll be doing a short workshop on personal finance on Sunday, at the Pan-SIG Conference in Kobe. As part of getting ready for that, I have been doing a lot of thinking, trying to tease out the basic principles. I came up with the following:

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?

2 Responses

  1. 1. My plan is very similar to yours. I’m projecting 4% across the board, too, knowing that growth is about 10% right now but I’m still keeping my own perspective at 4%.
    2. I’m also adding in some work income that I’ll pick up as part of the “surprise income”/icing on the cake.
    3. I’m not counting on pension income either – nice if I get it but not depending on it.
    4. I’ve got figures/savings goals set out annually to meet for the investments, and then look at the long term picture to make sure I’ll meet that long term goal (3, 4, or 5 million) interest income. [The annual income needed will depend on where you live in Japan; has your house/condo been paid off; your hobbies/money needs; and other details.
    5. I will not be in Kobe so cannot attend your presentation. I do hope you put it on your fb so I can learn.

  2. Thanks for the great comment! Seems like you have everything figured out.
    I forgot to mention 退職金, which I think is a bit more reliable than pension, but is also in the ‘pleasant surprise’ bucket. Seems like it gets cut every year anyway 🙂
    I am planning to put the slides/video from the presentation on the blog next week.