Beginner’s Guide to Financial Planning
What is financial planning all about? Probably more than you think!
Many people think that a Financial Planner simply wants to sell you an insurance policy, or invest your money somewhere. In actual fact, it’s so much more than that.
A financial plan looks at the big picture; where you want to go and how you are going to get there. Whatever you do in life, it doesn’t just happen by accident (99% of the time anyway) — you have at least thought about how you were going to do it. So why would your financial situation be any different?
Here’s 7 areas that you should look at when considering your future.
1) Goals and Objectives
What is it that you are trying to achieve in the first place? Are you saving for your dream home, or for your future, or for your children’s future? If you have nothing to aim for, you’ll never get anywhere.
2) Have a budget
Do you know what your budget is? How much are you spending, and where are you spending it? Does your income meet this, or are you funding your life on credit cards and overdrafts?
There are any number of apps out there which can help you track it. An even easier way of keeping track is if you belong to the same bank that I do, whose app evaluates where you spend your money based on your bank statement — so you don’t have to do any work at all.
3) Manage your debts
Don’t settle for high interest debt. There are so many credit cards out there that offer 0% on purchases for well over a year, or Balance Transfer Cards which let you shift your current credit card debt to another card, offering 0% for almost 2 years. Your student loan is the cheapest debt you’ll ever have, so don’t worry too much about it. Don’t pay huge amounts of interest that you don’t have to, and make sure you pay down the debt with the highest interest rate first.
4) Build an Emergency Fund
You should always have cash savings worth between 3–6 months of your income. It should be available immediately in case of emergency (the clue is in the name) particularly if you suddenly lose your job.
5) Protect Yourself, Your Family and Your Debts
You should have life insurance and critical illness cover, particularly if you have a mortgage or a family. This makes everything slightly easier for you and your family, should anything happen to you. It’s always a good idea to have a will, so that if the worst should happen, anything you have can be passed on quickly and tax efficiently, to who you want to pass it to. Remember, if you have got married since making your will, you will is now invalid.
6) Prepare for Retirement
Even if it is more than 40 years before you retire, the earlier you start saving, the more chance it has to grow. Pensions grow free of tax, your employer should contribute and your own contributions aren’t taxed, so the only real downside is you can’t touch it until you’re 55.
7) Invest What You Can Afford
Only when you have taken care of everything else, should you consider investing. Invest for the long term, and don’t try to time when to come out of the market, as dividends often provide a more reliable return than increase of capital value. Just invest as soon as you can, and leave it for as long as possible. Use up your ISA allowance first, as it can grow completely free of tax.
If you want any help or clarification with any of these issues, please do get in touch. As financial planners, we are to help with any issue in your financial life, and we are not here to just sell you something.