Why is financial planning an unavoidable task? A beginner's guide for newcomers

Over the past year, both economic and public health crises have revealed the critical necessity of financial preparedness—whether it’s income loss, unexpected expenses, or escalating debt burdens. Having a solid financial plan is the most important shield for your life; it is no longer a luxury.

Understanding the Basics: What Is Financial Planning?

Financial planning is a process that combines managing income, expenses, assets, liabilities, and goals to achieve long-term financial stability. It’s like planning a journey—you need to know “where you are,” “where you’re going,” and “how to get there.” Good planning is the essential foundation for reaching future objectives.

Reasons Leading to the Necessity of Financial Planning

Longer Lifespans and Resource Adequacy

Advances in medicine have increased average lifespans for Thais—men average 71.3 years, women 78.2 years. However, statistics show that out of 100 people, only about 25 have sufficient resources post-retirement. If you plan to retire at age 60 and need a monthly allowance of 30,000 THB until age 80, a total of approximately (20 years), you will need about 7,200,000 THB. Without preparation starting today, how will you support yourself after retirement?

Changing Demographics and Declining Number of Descendants

Society is shifting. Over 10% of the Thai population is over 60, and the trend among younger generations is fewer children—about 1-2 per family—due to rising costs of upbringing. Statistics show that 55.8% of elderly still rely on others, making it impossible to depend solely on children. Do you want your children to inherit your debt? Self-reliance is the smartest choice.

Impact of Inflation on Real Value

Inflation is the major enemy that erodes your money’s value. Goods and services costing 1 THB 20-30 years ago might now cost 40-50 THB. A bowl of noodles that once cost 5-10 THB now costs 40-50 THB, and in 30 years, prices could double or triple. If you keep saving without investing, your purchasing power will shrink each year.

Insufficient State Welfare

In 2021, the proportion of people aged 60+ is projected to reach 20%, meaning 1 in 5 will be elderly. Meanwhile, the working-age population per elderly will decrease from 6:1 to 3:1. The government’s budget will be insufficient to support welfare programs. The elderly allowance is only about 600 THB/month, and social security averages around 3,000 THB/month—are these enough for a decent quality of life?

Changes in Financial Products

In the past, depositing money in banks yielded satisfactory and stable returns. Today, interest rates are at historic lows—(1.00% - 2.00%)—making natural savings insufficient to meet financial goals. Conversely, investment options are abundant: over 726 stocks, more than 1,537 mutual funds, plus insurance products, life insurance, and other portfolios. Understanding and choosing suitable financial products is now a vital skill.

Discipline in Saving and the Power of Compound Interest

Starting early and planning well allows you to reach financial goals faster. Time is more important than amount or returns. For example, compare “Mr. Saver” who saves 10,000 THB initially and then 5,000 THB monthly for 15 years (180 months) at 5% annual return, ending with about 1,357,582 THB. Meanwhile, “Mr. Non-Saver” who only saves the initial 10,000 THB and no more, with 1% bank interest, ends up with only about 11,607 THB—a difference of over 1.3 million THB!

Risk Prevention and Unforeseen Events

Life is unpredictable. COVID-19 showed many people lost jobs simultaneously, some faced severe illness requiring huge medical expenses, and some families lost breadwinners, leaving debts behind. With good insurance planning, sufficient savings, and understanding your risks, you can better handle these emergencies.

Principles of Effective Financial Planning

Budget Management and Cash Flow Control

Budgeting is the foundation of personal finance management. Creating and tracking a budget helps you allocate resources effectively, understand your expenses, and save for future financial goals.

Saving and Investing

Saving is essential for wealth accumulation—setting aside part of your income for the future. Investing involves deploying funds into assets to generate returns and beat inflation.

Risk Management and Insurance

Risks are everywhere. Insurance plays a vital role by providing financial protection against unforeseen events such as injury, illness, or property loss.

Tax Planning

Tax planning aims to maximize tax benefits and reduce liabilities by managing income and investments legally, leading to additional savings.

Retirement Planning

Retirement planning prepares you financially for life after work, including setting goals, estimating expenses, and creating savings and investment strategies aligned with those goals.

8 Practical Steps for Effective Financial Planning

Step 1: Set Life and Financial Goals

Many save without clear objectives, leading to aimless saving. Set specific goals—buying a house, car, traveling, wedding, especially retirement, tax planning, and risk protection. Knowing your goals helps determine how much to save, for how long, and which financial products suit you.

Step 2: Record Income and Expenses Regularly

Over 90% of new workers face “month-to-month” problems with no savings. Keeping detailed records of income and expenses reveals your spending habits—what’s necessary, what’s frivolous. Many financial apps are available to make this easy, helping you think before each expenditure.

Step 3: Create a Personal Financial Statement

Many have worked years but have “assets none, debts many.” List all assets—bank accounts, investments, property, cars, other valuables—and all liabilities—mortgages, car loans, credit card debt, informal loans. Use the formula: Total Assets – Total Liabilities = Net Worth. This shows your true wealth after years of work.

Step 4: Prepare an Emergency Fund of 3-6 Times Monthly Expenses

In case of major events—job loss, illness, or other emergencies—you need accessible funds—3-6 times your monthly expenses. Keep this in highly liquid, low-risk accounts like money market funds or regular savings accounts.

Step 5: Analyze Your Risks and Prepare Protection

Many focus on property insurance (home, car) more than life and health insurance. If something happens to the breadwinner or in case of serious illness, not only does income disappear, but medical costs can cause financial crises. Protect yourself with life and health insurance.

Step 6: Adopt “Save First, Spend Later” Principle and Avoid Over-indebtedness

Shift from “Income – Expenses = Savings” to “Income – Savings = Expenses.” When salary arrives, set aside savings first—start with 10% of income. Avoid debt exceeding 45% of income; for example, if earning 20,000 THB/month, don’t pay more than 9,000 THB/month in debt.

Step 7: Generate Additional Income Sources

Many have faced unemployment. Multiple income streams—using your skills or side businesses—help cushion against emergencies. Multiple income sources are no longer optional but essential today.

Step 8: Make Money Work for You—Invest According to Your Own Plan

Invest savings into suitable assets based on your situation, considering returns and risk tolerance. For higher returns, consider stocks, mutual funds, or bonds. Understand factors affecting prices, diversify portfolios to reduce risk. For guaranteed returns, bonds or rental property may be suitable.

Step 9 (Additional): Invest in Knowledge

Today, free educational resources on finance and investing are abundant—websites, financial pages, YouTube, podcasts. Spending 1-3 hours weekly on learning enhances your financial planning and investment skills.

Summary

Effective financial planning isn’t difficult or relaxing; it requires proper knowledge, discipline, and starting today. Begin by creating a financial statement, building an emergency fund, avoiding excessive debt, and allocating savings into investments. Gradually increase your knowledge, and you will have a financial plan ready to face any economic crisis in life with confidence.