So you are looking into financial planning for the future. That’s an excellent start, because our experience in financial advisory indicates that proper financial planning can be more important in achieving your financial goals and comfortable retirement than your income or investment returns. But where to begin? Search online and you’ll be flooded with opinion, complicated acronyms and even some shady schemes. So we’ve put together this no-nonsense Q&A on where to begin and how to create your financial plan.
Where do I start?
First, you need to figure out your objectives.
The truth is, of course, that many of us don’t really know. Sure, we aim for more money and leisure and less work, but other than that we take things day by day. Having to confront your objectives can be so daunting that possibly more people shirk away from financial planning and analysis because of that than because of the ‘boring’ numbers and tax part.
What kind of objectives?
Basically those with the highest impact on your income and spending, such as:
– What career path you’d like to pursue (or continue pursuing) and with what intensity
– At what age you’d like to retire
– How many children you have, or are looking to have
– Where you live and intend to live in the future
– Your desired standard of living both while in work and in retirement, in terms of expenses like rent, leisure and travel
Okay. What then?
Then you need to assess your current financial situation, measuring your:
– Expenses, by category: rent, food and utilities, children’s education, leisure and travel, etc.
– Assets, by category: property, savings accounts, pensions, stocks, etc.
– Debt, such as mortgages or credit cards.
– The rates you earn on each of your assets (rent, interest, etc.) and have to pay on your debts.
– Where you pay income tax and at what rate.
So I have my financial goals and my financial situation. What’s next?
So you are financially at point A and want to get to point B.
What you need to determine next is:
– If you keep on your current track (A), does it seem likely you’ll achieve (B)?
– If not, what can you change in what you are doing to allow you to reach (B)?
– And how could you adjust your objective (B) in order to make it more achievable?
This is where the financial plan itself comes in.
Finally! So how do you create a financial plan, exactly?
At its core, a financial plan is a spreadsheet with a forecast of your financial life all the way past retirement to your life expectancy. It looks (and works) a lot like the budget or accounting statements for a company.
– You start off with the assets and debt that you have today
– Each year you earn income from work, from your investments and maybe also from inheritance
– Each year you have expenses that depend on your lifestyle and family situation at that point in time
– You pay tax on your income. The difference between your after-tax income and your expenses are your savings.
– You invest those savings, and they will earn investment income in future years.
Typically, your objectives (B) will cost you money – having children, buying a second home, and so on. And your current situation and track (A) determine how much money you have and make. The plan shows whether A and B are coherent, and, if not, gives you a framework to test what could be adjusted.
What are the outputs of a financial plan?
Targets and a to-do list.
Once you’ve figured out how to make your current track fit in with your goals on paper, you need to apply that to real life by setting targets and making the necessary adjustments. For example, you might find that:
– You need to save 20% of your income to reach your goals, and on paper that seems feasible. But in practice you have been saving only 10%. You might need to set a monthly budget and avoid some indulgences.
– You’re paying more tax than you need to. If you move your investments into a different structure, over the years, the extra income could save you the equivalent of years of work.
– You’re earning less than you should on your investments. If you opted for a more balanced portfolio with top-tier funds, the compound effect over decades would be hundreds of thousands of pounds, even though the difference is only of a fraction of a percent in the yearly rate.
Sounds good! What are the next steps?
Getting started thinking about some of the points above is certainly something you can do on your own. But, though at heart the financial planning process is simple, it can help to have an experienced outsider’s perspective, and it’s hard to keep track of the latest tax and investment options. For more information on how to increase your wealth read this interesting article.