Getting a Foot In the NSE Door Part 1: Create a Plan

In our previous post, we addressed the “why” for getting involved in the stock market. That gives us a firm foundation on which to build the “how’. To meaningfully participate in the stock market, three things are fundamentally necessary – a personal financial plan, a stockbroking agent and some research. Owing to its importance, we will talk about the personal financial plan here, and then the other two in the next post.

We also previously discussed that investing in the stock market is a consequence of having financial goals towards which one is committed. Your financial goals will demand the setting apart of money from your regular income that will seek investment to earn returns and grow. If your interest lies in stocks, then you will find yourself considering building a portfolio made up of good stocks.

Establishing your financial goals is one of the steps in the process of developing a personal financial plan. Goals state specifically what you want to achieve, and in what timeframe. You then determine the amount of money you will need to have by that future date in order to realize your goal. Other elements of the plan will include establishing where you currently are in terms of investments that ultimately contribute towards the fulfilment of your goals. One of the fortunate things about the culture in which we find ourselves is that saving and investment is somehow caught by most of us either from our families or our peers. We will almost always find ourselves in SACCO, a chama or with an insurance policy of sorts. The absence of a coherent plan does not always mean an empty portfolio. Most of us will not be starting from zero, we will just need to create order.

Quite often, however, we do not even know how much the assets or portfolio we hold is worth, and worse still, whether continuing with our current habits is likely to deliver our desired future lifestyles. A personal financial plan addresses this by seeking to bridge the gap between your current status and your desired future. The tool for this is some element of financial modelling that helps determine how much you need to periodically put aside to invest for each goal, and a budget that sets aside that amount from your regular income.

The budget forces you to look at your current lifestyle and money habits in order to determine whether they are aiding the attainment of your financial goals. By including the money you need to set aside for investment towards your goals, you will be the exception if you find your budget having a surplus. For most of us, a budget that includes your necessary savings for investment will return a shortfall. It will then force us to make the necessary adjustments if we want to be true to our goals, or indicate to us the need to seek ways of augmenting our income. Finally, the financial planning process will help you allocate the amounts you put aside for investment to various investment products that are aligned to your various goals.

As you must have realized by now, the mechanics of developing a personal financial plan can be quite daunting. Not many of us can sit on their own and develop a complete plan on their own. I was a qualified accountant at age 25, and I did not get around doing a complete personal financial plan for myself until way into my 30s. Fortunately, what could be frustrating to the point of giving up is a painless 2-4 hour session with a personal financial planner armed with a well thought out tool. It will cost you something to engage one, but if you truly value your time like we all should, it will be a great bargain. A good plan is well worth its cost.

A caveat though: seek to use a financial planner who is more committed to your financial success than they are interested in selling you the investment products they may be offering. All it takes is a look at what they recommend you primarily invest in and how they stand to gain from it, vis a vis its fit for your goals. I have seen professionals selling a particular product but who for expedience package themselves as financial planners. They plan you into their product.