7th June 2024
general
Many people believe that financial planning is simply about investments and getting the best return on their money. Others engage with financial planning as a reaction to a problem or a major life event.
But ideally, financial planning should be a lifelong, proactive process which incorporates all of the building blocks outlined below.
Setting Goals
Your financial plan should be centred around your goals and objectives. How can you determine if your financial plan is on track if you don’t know what you’re aiming for?
Your goals might include:
You can include anything you like, from smaller, short-term goals (such as a holiday) to long-term lifestyle goals.
To give you the best chance of achieving your goals, they should be SMART: Specific, measurable, achievable, relevant, and time-based.
Budgeting
To get started with your financial plan, you need to have a clear picture of your income and expenditure. This should include regular bills as well as any ad hoc spends or annual costs.
Looking at an average month, do you have a surplus or a shortfall?
If you have a shortfall, a financial plan can help you to get back on track depending on your circumstances. This might mean earning more money or adjusting your lifestyle.
If you have a surplus, your financial plan will help you prioritise what to do with it.
Cash Management
The main reasons you need cash in the bank are:
Your financial plan will help you identify how much you need for each category. It’s often a good idea to keep multiple cash accounts for different purposes.
Planning for Risk
Protection is an important part of financial planning. Most people need the following types of cover:
The types and amount of cover, as well as the product features you need, will depend on your circumstances, including earnings, budget, family situation, debts, and health.
Debt Reduction
Your financial plan can also help you make decisions around debt. This might mean clearing all debt as quickly as possible, or using credit sensibly to enhance your financial position.
Generally, when it comes to expensive consumer debt, it’s a good idea to clear this as soon as possible and avoid taking on more.
Mortgages and student loans, on the other hand, can serve an important purpose and interest rates are typically not as high.
Tax Efficiency
Saving on tax should not be the end goal in financial planning, but it is an important consideration.
Sensible tax planning might include making ISA contributions, maximising your pension allowances, and using your capital gains tax exemption. It might also include investing in higher risk or sophisticated products to save on tax, but only if this is suitable and you can afford to take the risk.
Your financial plan can help you establish where it is prudent to save tax while keeping your goals at the forefront.
Investment Planning
Investing can be complex, and many people focus on the wrong things. There are no ‘get rich quick’ schemes, there is no best time to invest, and there are no investments which are guaranteed to do well with minimal risk.
A sensible investment plan is based on the following:
If you start with what you want to achieve, and therefore the investment return you need to get there, the picture becomes much clearer. If you only need modest returns, you might not need to take as much risk as you thought. If you need higher returns, your might want to revisit your goals or save more rather than relying on investment returns.
Retirement Options
Planning for retirement is probably your most important, and longest-running goal. Your financial plan can help you determine:
Estate Planning
Many people put off decisions around estate planning, but it is a key component of your financial plan.
As a minimum, you should make sure you have a Will and Powers of Attorney in place, regardless of your situation or the size of your estate.
If you have an Inheritance Tax (IHT) liability, your financial plan can help you make decisions on how to address this, for example by making gifts, setting up trusts, investing in assets which qualify for business relief, or arranging life insurance.
Even more importantly, it can help you maintain IHT efficiency while making sure you still have enough money for your own needs.
Staying Accountable
A financial plan is not a one-and-done event. Your circumstances and goals will change, legislation will be altered, and investments will rise and fall. You can’t control the market or the economy, but you can adapt your plan as you go along to make sure you stay on track.
It’s worth reviewing your plan at least once a year and making any changes in plenty of time.
Even if nothing changes, reviewing your plan can help you keep your discipline and avoid picking up bad financial habits.
This is an area where many people benefit from financial advice. Having an objective person holding you accountable can give you a better chance of achieving your goals.
Please don’t hesitate to contact a member of the team to find out more about financial planning.
