Guess where you want to go
The first step in creating a financial plan is to get clear about where you are, and where you want to be. It’s about making the connection between tangible things like the money you have and aligning this towards the things that are really important to you. However, understanding where you want to go is not necessarily easy to map out.
When it comes to the future, we don’t know what is going to happen. We don’t have a crystal ball. So rather obsessing over goals and trying to get really precise around them I think it is best to make a best “guess.” Things change and the decisions we make around money and life will never be “perfect” and should not be set in stone. It’s an ongoing process of making adjustments in line with the uncertainties that life throws at us.
Be clear about your current position
Once you have made a “guess” as to where you want to go you need to get clear about where you are. The best way of doing this is to create a personal balance sheet which involves detailing everything you own and everything you owe.
Budgeting
If you have got some clarity around your current position this now might be the time to start saving or investing your money. However, it is important to firstly track where the money is going to come from.
Being aware of how we’re spending our money is really important. Budgeting requires discipline and can be hard. Financial goals get funded with pounds – lot’s of them added up over time – and pounds tend to slip through our hands unless we are doing something to plug the holes. Budgeting is about understanding that the holes exist and taking action to plug them.
Save as much as you reasonably can
I disagree with the notion that we should work as much as we can now, so that we can live comfortably when we retire. Life isn’t just about retirement and a financial plan should not have such a rigid framework that denies us from being happy and living today.
There are lots of rules of thumb about how much to save which are usually based on age and a percentage of salary. I think the best view is to save as much as you reasonably can, although falling victim to the pull of instant gratification can affect our ability to do this.
Saving towards something that is likely to be far bigger and better in the distant future may seem off radar compared to buying something today. But the constant pull of instant gratification repeated over a long period of time is likely to derail a plan.
Insurance and debt
Before any money is invested it is important to assess whether any life and ill health insurance is needed and if so, how much. This can be uncomfortable because it centres on what would happen when we are no longer here. Although it can’t replace an emotional loss its sole purpose is to replace an economic one.
Paying down debt may be preferable to investing and should be viewed as an investment giving a guaranteed return. There is no such guarantee with an investment. Comparing the interest rate on the debt to the expected return on the investment should help to decide which course to take, but other factors may need to be considered as well.
A word about Investing
If there is a need to invest, typically, we are talking about money you will not require in the next five years or so. This gives a greater chance to recover from any market falls.
Investing is personal and should be closely aligned to your specific circumstances.
Key takeaways are to diversify your portfolio to lessen the risk of one holding hurting it. Keep costs low so you keep more of the returns. Determine the split between risk assets (equities) and defensive assets (fixed interest) that you can emotionally tolerate.
Be mindful that a higher allocation to risk assets is likely to result in a higher return in the future (although not guaranteed); but will fall more in a downward market.
Stay invested and don’t look at it too often.
Finally, avoid all the “noise” coming from the media as to what you should or shouldn’t be doing.
Stay the Course
Sticking to a plan is not always easy and because we are human the temptation to stray away from it can be strong! Emotions can cloud our judgement so working with an objective third party, whoever that may be, can help. Most importantly keeping focus on what is really important is likely to help to stay the course.