The Basics Of Financial Planning

March 23 2020 | Category: Money advice

Let’s face it – everyone wants to have a solid financial plan that provides for their family and their future. But only 40% of people actually have one. The problem is that unless you develop a formal strategy for your finances – a bit like a written out plan – it can be very difficult to achieve any of the financial goals you might have set yourself. Like getting out of debt or buying a house. And let’s face it, if you do achieve a goal without a plan, it’s as much down to luck as it is to hard work. But if you’ve never engaged in any form of financial planning before, you might not know what that looks like. So today we’ve put together some of the basic steps you need to take to create a financial plan.

Define Your Goals

Before you can make any kind of plan, you need to know where you’re aiming for. What do you want your finances to do, what do you want to achieve, and can you create strategies to help you accomplish them. For example, you might want to build a savings fund for your children for university, to buy a house outright, or just to get out of debt. Whatever the goal is, write it down. Once you know what your short and long term goals are, it’s just a matter of creating a plan as to how you will get there.

Setting Up A Budget

There’s no getting around the fact that any type of financial planning is going to require creating surplus money in your finances. Whether your goal is to retire at a certain point your life, or to pay off your mortgage, you will need extra money in order to make any such goal a reality. This is why a budget is so important. A lot of people skip this step, and that’s the reason why they never accomplish any kind of meaningful financial goals. Putting together a budget means you know exactly how much money you spend each month compared to the amount of income you earn and use that information to do the following.

Cut Expenses

Putting together your budget should have thrown some light on areas you are currently wasting money, since you now know where it’s all going. So now you can go through and label the essential expenses and work your way down to the non-essentials. Things like entertainment, holidays, fast food, eating out and recreational shopping – which might be nice, but aren’t essential. Cutting these out opens up some cash flow, which you can now direct into savings and paying off debt.

Creating An Emergency Fund

Once you’ve identified significant expense cuts in your budget, the next order of business is to set up an emergency fund. This step is often ignored in favour of other goals that seem to be more dramatic, yet it is entirely a financial must have. An emergency fund is basically a savings account or money market that represents your liquid cash. The idea is to have it available when either an unexpected expense hits, or when there is an income disruption. That will not only enable you to weather a short-term financial storm but will also help you to avoid borrowing money for the same purpose. The general rule for an emergency fund is it should contain sufficient cash to cover 3 to 6 months’ worth of living expenses.

Getting Out Of Debt

Once you have an emergency fund with a good amount of cash in it, you can turn to what is many peoples pressing problem – debt. Debt is a very easy merry-go-round to get on, but can be very difficult to get off. The cash flow you created in your budget by cutting expenses (the money that was going into your emergency fund) can now go towards paying off your debt. There are a few methods you can use to do this, but we like the ‘debt snowball’ method. Here you make a list of all your debts, and you target the smallest debt and pay it off. Once that one is paid, you target the next smallest. Each debt that’s paid off, regardless of how small, is a victory, and can give you a big boost.

Saving For Retirement

Hopefully you’re already saving for your retirement, even if it’s just a little bit each month. But as you get out of debt, your cash flow begins to increase, which will ultimately enable you to save a lot more money for retirement, and for everything else. As is the case with every other financial goal, the most important step in saving for retirement is to get started. If you have not done so already, start contributing to a plan with an amount that does not significantly hurt your financial situation overall. Once you have that going, your goal should be to increase your contribution level each year.

Saving For Other Goals

Of course, retirement isn’t the only reason to save in life. There will be other things you want to do and goals you want to achieve – and you should have a plan in place for those too. For example, saving for a once-in-a-lifetime trip, for your children’s education or to buy a car outright to avoid going into debt. These are known as intermediate goals, and one of the best ways to save for them is to put a little bit away into a savings account each week. Make sure you know what it is you’re saving for and how much you need to make this effective.

Having Adequate Insurance

There are a whole bunch of contingencies you can’t possibly save enough money for, no matter how savvy you are. Luckily, that’s where insurance comes in. There are a wide variety of insurance types available that can cover you for pretty much anything, and the types you need will depend on your situation. This includes things like:

  • Life insurance
  • Health insurance
  • Car insurance
  • Home insurance
  • Business insurance (if you’re self-employed, or own a business)

Along with the obvious benefits of each, these insurances protect your financial assets – which is why insurance is such a fundamental part of smart financial planning.

Setting Up A Will

This last one might seem a bit morbid, but the truth is that financial planning doesn’t end when you die. You need to make provisions for what will happen to your estate when you’re gone. Even if you’re young at the moment and still building up your estate, it’s important to create a will for what you do have, documenting your wishes. Over the years you will need to keep this updated but having a will in place of any form is better than nothing.

At Chilvester Financial, we love helping individuals of any age and situation start their financial planning journey. Our experts are on hand to help you with every element of your financial plans, from pensions and retirement options to savings, mortgaged and even getting the right insurance in place. If you would like to know more, or want to see if we could help you achieve your financial goals, just get in touch with the team today.