Whether you’re just starting at university, heading into your first job, managing the family budget or running a business, financial planning is an absolute must. It helps you see your overall financial position; your incomings and outgoings, what you can and can’t afford, and how much you can put aside into savings for the future or investment.
Recent research by abrdn, a global investment company, revealed that 55% of UK adults are determined to improve their financial health this year. This is great news but what is also interesting from the survey is that 69% see the benefit of managing their finances better to their overall health, happiness and wellbeing. Indeed, 60% believe that looking after their own financial health could mean they are more able to support others.
The Covid-19 pandemic as well as the energy and cost living crises has meant that people are focusing more on their finances than ever before. Financial planning that is consistently reviewed and updated not only helps you understand your spending habits, but also reveals where you can potentially make savings.
What is financial planning?
There is a very famous quote from the American author Alan Lakein which many people will have heard – “Failing to plan is preparing to fail”. This can be applied to a multitude of things but it is particularly relevant to financial planning.
A financial plan shows you a comprehensive view of every element of your finances, from cash flow and savings to debt, insurance and investments. Not only does it give you the big picture of where you currently are, it is also a way to strategise to achieve your future financial goals. An effective financial plan allows you to maximise your assets and monetary opportunities, as well as survive the difficult times.
It’s important to remember that your financial plan is flexible; it will change as your life and circumstances change. For example, leaving education and moving into full time work, buying or renting your first home, supporting your family, or even longer term goals, like retirement.
Why do I need a financial plan?
If you’re managing to afford all you need, you may think that you don’t need a financial plan, but you do and here are the reasons why:
- Managing your income – understand how much of your income needs to be put aside to pay bills, tax, other expenditure and add to savings.
- Understanding cash flow and capital – monitor your spending habits and expenses, which will show where you can make savings if you need to. Better cash flow often leads to increased capital, which will enable you to consider short and long-term investments to secure your overall financial wellbeing.
- Family security – ensuring you have the finances, now and in the future, to keep your family secure, such as the right insurance cover.
- Solid investments – a financial plan will encompass your current and predicted circumstances, detail your objectives and your level of risk. This allows you to have a better understanding of the type of investments that meet your financial needs, and goals.
- A better standard of living – knowing what’s coming in and what’s going out, and what you can put aside in savings, gives you a long-term better standard of living.
- Knowing your assets – list your assets and your liabilities to give you a better picture of their real value, their associated risk, and being able to make informed decisions.
- Building your pension pot – around 17% of people over the age of 55 in the UK don’t have a private pension and will be relying solely on their state pension. There is still a significant gender pension and savings gap and this needs to be considered in your financial plan. In some regions of the UK that gap is almost 50% meaning that some women will retire with half of what men do.
- Savings – 24% of UK households don’t have any savings at all; 33% have £250 or less put aside should times get tough, says new research from HSBC. Anyone can find themselves in a situation where their personal circumstances change, sometimes overnight, such as redundancy. Yes, investments are a good option but you may find that your money is tied up and it’s not so easy to liquidate. Putting enough money aside in savings that can be drawn upon on a rainy day is a key part of your financial planning.
- Understanding your financial position – whether you are earning enough to pay your bills and live comfortably, you are struggling to manage your money or have debts, understanding your financial position will give you a clearer picture of your finances.
Setting out your financial situation and goals, planning for the now and the future, will have a positive impact on your financial health and overall wellbeing.
How to create a financial plan
Whether you are saving for a deposit for your first home, getting married or starting a family, or wanting to build a nest egg for your retirement, a financial plan will set out the road map to achieving these goals. But it can sometimes be difficult to know where to start in creating a financial plan. So, here are our steps to help you.
- Set your financial goals – your goal may be just to survive the cost of living crisis, to build your savings or another goal. Putting your short-term, mid-term and long-term goals into writing often consolidates your financial future.
- Determine your budget – this is your monthly incomings and outgoings, your cash flow, and will give you a comprehensive view of how you are spending your money. Consider using the 50/30/20 budget principles – 50% of your take home pay goes towards your housing, utilities, transport and other recurring costs; 30% goes towards what you want, such as entertainment, clothing or dining out; and 20% goes towards debt repayment and savings.
- Track your finances – it is one thing setting out your cash flow but you must also track your finances to ensure they are in line with your plan. Any variances must be added to keep your plan up-to-date.
- Allow for taxes – this is one element that is often missed but can be important, particularly if you are self-employed. Include any income tax credits, benefit payments and deductions.
- Set up an emergency fund – we all need one of these to help us through the difficult times.
- Manage any debt – if you have any debt, and more than 16% of the adult population does (not including mortgages), adding it to your financial plan will help you manage your debt and become debt free in the future. Focus on toxic high interest debt first, like credit cards and some loans.
- Don’t forget your retirement – we’re often so focused on the here and now that we forget to plan for the future, your retirement. Think about the way you want to live in retirement and plan how you are going to achieve that.
- Improve your financial wellbeing – as you go through life, it’s important to protect and build on your financial health, such as increasing contributions to any pensions or retirement funds when you can, boosting your emergency and savings funds, as well as ensuring you have the right insurances to protect you and your family, such as life insurance.
However, the sooner you can plan your finances and get a better idea of your circumstances, the quicker you’ll be able to see where you can make savings, and start to live a healthier life.
Remember, a financial plan is about setting out your financial goals and how you are going to achieve them. If you’re struggling with money or have debts, it can be a daunting experience to lay bare your financial position. Really Helpful Club’s Directory members are on hand to give you sound financial advice and support with every aspect of your financial planning.
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