What steps are there in the financial planning process?
There are a lot of aspects you’ll need to consider when preparing a financial plan and several steps you’ll need to take to ensure it comes to fruition, but here’s a quick run-through of some of the steps you may like to take:
1. Identify your goals.
Your goals are of course going to be highly personal, but they’re likely to include things like buying a home (or even a second property), having an emergency fund, clearing debt, building an investment portfolio and perhaps starting a business, and you’ll probably be hoping for a secure retirement and the ability to leave an inheritance, too. You might like to include smaller goals on that list as well, such as buying your dream car or going on a once-in-a-lifetime holiday, so you can focus your mind – and your savings – accordingly. Once you’ve outlined your goals, every other financial decision you make can be focused on achieving them.
2. Consider your monthly budget.
Knowing where your money’s going – and how it can work better for you – can be key to achieving your goals. Start by making a list of your income and outgoings, look for areas you can cut back on, and consider how much you could funnel into a savings account or pension each month.
3. Reduce your debts.
You’ll want to pay close attention to short-term debt and look for ways to reduce it, such as by consolidating with a personal loan, or utilising a balance transfer credit card. Your ultimate aim is likely to be debt-free, and if you include it as part of your financial plan, you make yourself accountable and can work on reducing your debt accordingly.
4. Think about risk.
Before you start to consider investment opportunities, it is important to consider if you can risk any losses. For example, those just starting to save into a pension in their 20s or 30s may prefer potentially higher yielding but more risky investments than someone in their fifties or sixties who nearing retirement and needs certainty of the funds being available. A financial adviser can help you to understand more about the risks involved and how these fit your lifestyle now and in the future.
5. Choose the right financial products to align with your goals.
This can include things like savings accounts, mortgages, pension plans and even insurance policies, particularly things like income protection and life insurance so you can protect your long-term interests. Depending on your goals and current financial standing, you may also be considering ways to build your investment portfolio, such as buy-to-let or investing in the stock market, together with wealth management options.
6. Account for contingencies.
Your financial plan is always going to be a best-case scenario, but you’ll need to plan for the worst case, too. You’ll want a contingency plan set up in the event you lost your job, for example, or in case your investments don’t go to plan; that way, unexpected events needn’t derail your plan altogether.
7. Think about tax.
The decisions you make in your financial plan also need to consider the tax implications. A financial adviser will be able to make sure your decisions are understood in relation to any tax implications.
How often should you review and update your financial plan?
It’s generally recommended to review your financial plan once a year, but if any significant life events occur before your usual check-in date, it’s best to review and potentially update your plan when they happen. This can ensure you’re still on the right track to meet your goals and can cope with any change in circumstances.
How many times a year should you review your monthly budget?
Your monthly budget should be reviewed more frequently than your overall plan, particularly if you’re in the early stages of budgeting. You may like to do quick spot-check of your finances on a weekly basis, together with a more thorough overview each month, thereby ensuring that you’re not overspending and that your finances are under control.
How is your net worth calculated?
Your net worth is the total value of everything you own in cash terms (including your house, car, investments, any businesses you own, and the cash in your bank account), minus your debts (including your mortgage, personal loans and credit card debt). A quick calculation of the former minus the latter should give you a ballpark figure of your net worth.
How could a change in family circumstances impact my financial plan?
There are any number of family circumstances that could impact your financial plan, from an upcoming wedding or job change to divorce and bereavement. Some of these can be effectively planned for, others perhaps not so much, but it’s vital that when any such change occurs you’re able to manage the impact on your finances.
This may involve utilising certain insurance policies, for example, or updating your investment portfolio, and in many cases you may need to seek the advice of experts to ensure you’re able to refocus on your long-term goals and get back on track.
Lifestage planning as part of your plan
It’s wise to plan for different life stages ahead of time, as that way, any potential changes – and the consequences of them – can be carefully mitigated. So for example, you may want to plan for the arrival of children or grandchildren, receiving an inheritance or perhaps selling a business, and planning for your retirement should of course be a central part of any financial plan.
What should I expect from a financial planner?
While the simplest of financial plans can arguably be created and followed on a DIY basis, it’s often advisable to seek the help of the experts. Financial planners are there to help you make the right decisions with your money, which can ultimately help ensure you reach your goals – but what should you expect from them?
A financial planner will work with you to create a personalised plan, helping you to identify (and eventually, realise) your goals, and can help you analyse your spending to improve your cashflow and ensure you’re able to budget effectively. They can help you create contingency plans and can even make sure you’re maximising your tax allowances, pension contributions and investments, and can put wealth management strategies in place to ensure your money continues to work hard for the future.
They can help with retirement planning, too. By taking a long-term view, your financial planner can help optimise your wealth and ensure you’ll be able to have a comfortable retirement, giving you a better idea of what your post-work life could look like as well as advising ways you could be doing more with your money to bring your retirement goals forward.
You’ll often be able to benefit from ongoing advice as well, which can be ideal in situations where your plans may have to change – if your financial situation differs over the years as a result of a new job, a new business or simply a desire to change your lifestyle, a planner will be able to help ensure you continue to make the most of your money. Ultimately, you can expect a financial planner to take your vision for the future, and help you plan for it.
Are financial planners worth it?
Financial planners and advisers usually charge an advice fee for their services. This could be a single fee or an ongoing fee depending on the type of service they are providing. The aim is that the investment strategies set out by your financial planner will help you to achieve a better return than on your own and/or help to protect your portfolio from any market shocks or reduction in value.
Financial planners can help you identify options you may not have thought about, and their expertise can also ensure you’re able to make better financial decisions.
They can of course really come into their own for those with a high net worth, or who are planning on building an investment portfolio, with expert insight often making all the difference when it comes to effective wealth management.
What is the difference between a financial planner and a financial adviser?
A financial planner and a financial adviser are usually the same thing. Both will take a long-term view of your finances, working with you to identify your overriding goals, and will help you put steps in place to achieve them. They take a holistic approach to financial management and will be working with you on an ongoing basis, and although they may advise on the financial products you could need, they’re merely seen as tools to achieving your ultimate goals.
