Step-by-Step Guide to Financial Planning for Pinoys in 2022

When it comes to money and plans, it can be difficult to strike a balance between short-term desires, long-term goals, and unexpected events.

From the groceries you need to the retirement you want to the looming car repair bill, it can be hard to figure out how to pay bills while also planning for the future.

If you want to create a personal financial plan but aren’t sure where to begin, this article is for you. It walks you through what you need to know step by step to create a personal financial plan and get your finances in order.

In these 5 steps, you’ve created a solid foundation on which to build your life. It’s fine if you’ve already started some of these steps.

It’s also fine if you haven’t. Begin with a single task and work your way up.

Before we go any further, let’s talk about what financial planning is.

What is Financial Planning?

Financial planning is all about making sure that you manage your money in the best way possible so that you can live a decent life while you work toward your own goals.

There are action plans that you put in place that can help you get where you want to be. This means that you must be aware of your current situation and have a picture of a future that you want to achieve in order for this method to work.

Basically, it gives you advice on how to manage your money, keep track of your spending, and think long-term when it comes to your finances, money, and spending.

Importance of Having a Solid Financial Plan

Financial planning isn’t taught in school, so unless you’re surrounded by financially savvy parents, you’ll have to figure it out on your own. The following statistics highlight the need for better personal finance education in the Philippines.

  • According to a 2015 research by Standard and Poor’s, just one out of every four Filipinos is financially educated.
  • Three out of four Pinoys lack a bank account.
  • 78% of Flipinos lives below the poverty line.
  • 3.1 million Pinoys reported hunger.
  • Only 1% of us own stocks, denying the other 99% a way to earn passive income and participate in our economy’s growth.
  • Today, three out of four elderly people are poor, according to the National Economic and Development Authority.

The scope of this article is far too broad to discuss the structural changes that our country requires. Instead, it will concentrate on the aspects over which you have control.

What are the Benefits of Financial Planning?

The advantages of having a solid financial plan are the following:

  • Helps you stay disciplined and in control of your finances while you work towards your goals.
  • Helps you make and achive short, medium, and long-term plans.
  • Helps you how to handle debts.
  • Provides various options for accelerating your savings and building wealth.
  • Prepares you with safety nets for rainy days when life gets tough, such as an emergency, an accident, and so on.

Ready to create your financial plan? Just follow these steps.

Step 1: Define Your Financial Goals

The first step is to identify your financial objectives. You must sit down and think long and hard about what you want in life and try to put a price tag on things that have a cost.

It is acceptable to provide an estimate for these items, though having a realistic cost is preferable. As an example, consider the table below.

GoalsYearsCostAnnual Savings
Child’s Education181,000,00055,556
Business Capital3150,00050,000

As you can see, the table includes specific goals like saving for retirement, buying a dream home, and a car. Then there’s a column that says how long these goals should take to achieve.

The last two columns show the estimated cost and how much you’ll need to save each year to cover them. (Divide the cost by the number of years to get the annual cost.)

Step 2: Know Your Financial Status

The next step is to assess your financial situation. This is important because you need to know if your current income exceeds, suffices, or can be optimized to meet your goals.

It also allows you to assess whether you’re accumulating the right assets to build your wealth for your desired future.

So, first, look at your cash flow, or the difference between your earnings and your expenses. The difference between the two is, of course, your savings, that portion of your income that you can dedicate to your goals.

Determine financial pressure points like recurring bills, debts, mortgages, and other expenses. Then you can assess your ability to maintain your lifestyle and achieve your goals.

Step 3: Start Working With Your Goals

It’s the core of financial planning! You start by comparing your income to the required capital to realize your dreams. Using the table above, you can see that to achieve all of the goals, you need to save ₱759,722. (Inflation is not considered because this is an example.) In monthly savings terms, that comes to ₱63,314.

What to do next depends on different situations:

Stay With the Plan

Your savings can address your goals, so you may only want to maintain your current standard of living, and you may be more interested in how to protect your income and assets by building an emergency fund, purchasing insurance, and so on.

You might also want to fill your days with activities that give your life meaning, such as participating in sports, donating to charities, collecting artwork, and so on.

Help Others

Your earnings exceed your objectives, and you are willing to make sacrifices in order to help those you care about or those who are less fortunate. Your financial planning is no longer centered on your requirements. Instead, it will be concerned with how to best care for those who are important to you, such as leaving a large estate to your heirs or donating to your favorite charity.

Improve Standard of Living

This is where the majority of us fall. Your plan focuses on accumulating assets that will someday generate passive income, fast getting out of debt, and boosting current earnings in order to live a more comfortable life and achieve the goals you’ve set for yourself.

Pay Yourself First

The majority of us would fall into the third category, where our current income is insufficient to get us where we want to go. And this is where prioritizing yourself would be extremely beneficial.

You must reconsider your approach to saving. Most of us believe it is what remains after all of your spendings, which is:

Income – Expenses = Savings

But that’s an old trick. It also places your savings at the bottom of the priority list, making you more likely to justify your spending.

A better approach is to calculate your savings before you make any other purchases.

Income – Savings = Expenses

The main difference is that it alters your attitude toward money management. Instead of waiting until the end of the month to see how much you’ve saved, you twist the concept by determining the exact amount you’ll save and then controlling how much goes to your spending.

This will lead you to the next step, which will be to figure out how to increase your savings. There are two options for accomplishing this. Sticking to a budget allows you to reduce your expenses, increase your income, or do both.

Stick to a Budget

A budget is a realistic estimate of your daily expenses that you can live with. It should resemble your cash flow analysis in appearance.

The distinction is that, whereas cash flow is a record of past income and expenses, a budget is an estimate of your future.

Remember that planning is about bringing the future into the present so that you can take action. Budgeting accomplishes just that.

It enables you to take control of your current life by estimating and sticking to your living expenses so that you have enough money to make your dreams a reality. Begin the habit of saving regardless of your income.

Your budget should be based on your ability to save money each month. If it does not, return to it and figure out how to save money.

Make a decision about changing your way of life. It is also critical that you decide how you will adhere to your budget.

This is an important aspect of financial planning because it involves the concept of sacrifice,’ which is giving up some of the things you currently enjoy in order to pursue a larger goal later on. It is possible that you will need to:

  • Prioritize needs over wants.
  • Be mindful in the use of utilities so you can lower your recurring bills such as power, gas, internet, mobile communication, etc.
  • Check if you can also let go of subscriptions such as streaming platforms, cable TV, etc.
  • Look for necessary products at discounted/bargain prices.
  • Let go of luxuries and stick with the essentials without feeling that you’re depriving yourself.
  • Learn to redefine a standard, decent lifestyle.
  • Change present lifestyle by spending less in order to save more.
  • Substitute expensive preferences (fashion, hobbies, etc.) for affordable alternatives.
  • Sell assets that are no longer needed in order to increase cash available for saving.
  • Reduce inheritance for heirs.
  • Pay debts with higher interest, or avoid paying interest on purchases.

Increase Your Income

You may find that no matter how much you cut back on your spending and live frugally, you still don’t have enough money to go around. Look for ways to supplement your income to increase the amount of money coming in. Several options come to mind.

  • work harder to get  a promotion
  • change to high-paying job
  • get a part-time job
  • work for project-based income streams such as hosting gigs, being a wedding singer, etc.
  • learn new marketable skills
  • engage in small business
  • invest in assets that can earn passive income such as Pag-IBIG MP2

Step 4: Maximize Your Savings

You work in order to make money. It is time to learn the strategies for making it work for you. Learn how to earn money in a variety of ways, including investing in relatively safe assets such as time deposits and money market accounts.

You can also learn to invest more aggressively in equities and direct shares to increase your chances of making a profit.

But why should you invest?

Investing is a way to increase the speed with which you save. If you keep your spare cash in a piggy bank, it will not earn you any passive income in the form of interest. To achieve all of the goals listed in the table above, you’d need to save every year.

Now, if you put your money in an investment that earns, say, 4%, 8%, or 12% per year, the amount you need to set aside is reduced. This is because you can take advantage of compound interest, which allows your returns and savings to compound over time.

So, instead of saving ₱759,722, you can actually save ₱592,757 (4%), ₱477,617 (8%), and ₱397,879 (3%) each year (12 percent ).

GoalsAnnual Savings4%8%12%
Child’s Education55,55637,49424,72416,015
Business Capital50,00092,40885,56579,379

So the question is, where should you put your money in order to capitalize on the opportunity to earn more? What are the risks, and how can they be managed? 

We will be adding a separate discussion on investing guide for Pinoys so bookmark this page.

Step 5. Create a Solid Financial Foundation

Creating a financial plan is primarily concerned with ensuring that your objectives are incorporated into your daily reality.

But how can you safeguard your strategy? What happens if you need to use your savings in an emergency? What can you do to safeguard your objectives and keep you on track even when unexpected and untimely emergencies arise?

That is the purpose of the subsequent steps in financial planning. This involves having life insurance in the Philippines, creating an emergency fund, and maintaining your debts at a manageable level.