Money can’t buy you happiness, stability or health. But working out what your short, medium and long term goals are will help you arrange your financial plan in a way that increases, as far as possible, the chances of reaching those goals.
How strongly you want to achieve those goals and how quickly you want to reach them will dictate decisions taken in your financial plan. Most importantly, these are life goals, rather than financial goals. Financial planning is not about making as much money as possible – it’s about getting the returns you need to reach your life goals, using the resources you have and the risk you’re prepared to take.
A proper financial plan needs an understanding of the resources you have, what they’re worth and what they’re likely to be worth in the future. This might range from your pension and how much cash you have in the bank, to the value of your business or property.
Once an understanding is gained of your assets and liabilities, how close you are to achieving your financial goals can be worked out.
Financial planning aims to reassure you, as far as possible, about your future. As a result, not only do you need to take into consideration the direction in which your objectives require you to go, you also need to bear in mind the level of risk you are prepared to take in order to reach those financial goals.
Although taking more risk will increase the likelihood of you reaching your goals more quickly, this may not be something in line with your psychological attitude. Taking on risk that you are not prepared for in order to make gains you don’t need fundamentally undermines the point of a financial plan.
Once your objectives, resources and risks are understood, a financial plan can be built. This has four key components – planning for cashflow needs, planning how to invest your money, planning your affairs in a tax-efficient manner and planning for your financial safety or that of your family and business in the event of your illness or death.
Creating the right financial plan is not enough. Getting things done is equally important. Activities such as making the investments you’ve decided upon and getting the insurance needed to cover your safety needs are crucial steps towards making sure your financial plan is a living, working document.
Things in life change. As a result, financial planning can’t be a one–stop shop. Ongoing review is needed to ensure that the components of your financial plan – such as your tax, safety, and investment choices – are meeting your ongoing needs. Additionally, where there have been changes to your objectives, resources or risk attitude, these must be accounted for to maintain the integrity of your plan.