In my recent articles in the mainstream media, i have been discussing the role of an Investment Policy Statement (IPS) in providing investment counsel to individuals and corporate entities doing the business investing such as investment groups.
I have particularly emphasized the need to address a variety of priorities and concerns of the client and the context of the client’s overall financial plan. The issues include both short term and long-term objectives, risk tolerance as well as the financial ability to take loss, and risk and return preferences.
A good IPS is a highly customized document uniquely tailored to the preferences, attitudes, and the situation of each investor. It anchors the individual’s financial plan in its environment.
A financial plan on the other hand is written a logical road map that takes you from where you are to your financial destination. A personal financial plan is about creating a lifestyle that is just right for you – you define how you would like your life style to look like over the planning period and create in small steps. It is for everyone, whether they have large financial resources or not, as it concerns anything they do or plan to do that affects their financial state of affairs.
Preparing a financial plan involves a comprehensive evaluation of your current and future financial status and setting goals – predicting the future cash inflows, asset values and withdrawal over the next phases of your life and of your children. Setting financial goals involves identifying your needs and wants over a time period stretching into the future. It is simply put a description of how (details of) you want your future to look like expressed in-terms of asset classes and income amounts from those assets. This covers all aspects that deal with money for example your career plan, business planning, transportation, food, hobbies and vacation, entertainment and children education planning.
It requires building financial reserves for absorbing shocks as the environmental conditions change from time to time. Insurance and risk management action therefore must be included to secure your future against uncertainties during the life. A financial reserve or an emergency fund to handle emergencies is the first step to take care of in the execution of the plan.
A savings-plan integrated with investing actions to build wealth and counter inflation, a retirement and estate planning, and creating savings and investment plans are an integral part of the financial plan.
After analyzing your current and future needs, you will need to know how much you need to put aside every month for retirement and how you will distribute your wealth when you are still alive. The cash flow both in amount and timing, required to meet these needs present the constraints addressed by the Investment Policy Statement when allocating assets to achieve a life style. The choice of assets to put in the plan will informed by the amount of income required and the timing when it should come.
Patrick Wameyo, is Financial Literacy Educator and Entrepreneurship Coach. This email address is being protected from spambots. You need JavaScript enabled to view it.