How to start your financial wellbeing plan

May 5, 2020

I’m all about making lists, forecasts and planning ahead for the future.

Excel is one of my closest allies.

I guess that’s what inherently helped me in becoming an investment analyst, where making predictions about the future of companies, industries and markets was imperative to the job.

Of course, no-one knows for certain what the future holds; if we could always accurately predict the future, then surely that would make our lives much easier, albeit less interesting.

But making a calculated attempt to figure out what’s ahead of you in life is extremely important, in my view.

And that is the case in so many parts of our lives. It could be anything from the food you and your family may consume over the upcoming week, what school your child will change to next year, the holiday you intend to take or when you hope to retire.

And everything in-between.

What do the majority of these future decisions rely upon? The answer is clear: how much money you have to fulfil your goals and expectations.

Planning and forecasting are key in all aspects of our lives and doing it with your finances should not be any different.

Many people are afraid to think about their future finances. Don’t be.

You need to tackle the realities head on. And that’s why setting up a financial wellbeing plan will stand you in good stead.

Young or old, wealthy or not, the same applies. Financial planning is for everyone.

So where to start? The following steps will put you on the right path. Although you can set out a financial roadmap for yourself, speaking to a financial advisor to help your decision making is advisable given that everyone’s financial situation is different.

What is a financial plan?

A financial plan is a thorough picture of all your current finances, your financial aspirations and goals and how you expect to achieve them.

You should start with a blank sheet of paper and write down details of:

  1. Your income.
  2. Your cash flow.
  3. Your debt.
  4. All savings.
  5. Any investments.
  6. Any insurance.
  7. Any other relevant aspects of your financial life.

Your financial plan is an ongoing project that needs building, nurturing and adjusting as you move forward in your life. It is not something that you do and then forget about. It will evolve with you as you get older and so will always need consideration.

While you may find the initial stages of generating a plan somewhat difficult, you should quickly see any concerns or stress about your finances ease, simply because you will have a higher level of clarity in a plan that builds towards your goals.

What are your objectives and how will you achieve them?

Once you have a thorough understanding of all your finances, you need to get a clear picture of where you would like to financially end up and when you would like to achieve this by. This is driven by setting up one or more goals.

Working towards something always feels more purposeful than doing something just for the sake of it.

  • What goal are you working towards? Is it retirement, paying down debt, saving for a wedding, purchasing a house or building reserves for children’s school fees?
  • When do you need to achieve this by?
  • What total amounts will be required to fulfil your goals?

Once you have figured out what your objectives are, working out how this can be done is the next step.

  • What savings and investments do you already have?
  • Cash flow: What income is coming in and what will flow out on a monthly basis?
  • Can you foresee any major liabilities potentially arising in the future?
  • How much can you save within the timeframe?
  • Will it be enough?
  • If not, can you make adjustments in your life that will enable you to hit your targets? Gym membership, energy or insurance savings, phone tariffs, subscriptions etc.  

In undertaking the above you will be forming a budget to work towards your goals. The 50/30/20 budget idea is a well-practiced and easy to implement method. The idea is that 50% of your after-tax pay should be spent on needs, such as (bills, transport, ongoing payments), 30% spent of ‘wants’ such as entertainment and clothing and the remainder on saving and paying down debt.

Don’t forget to save for emergencies

It is always good to have a financial buffer and one of the first considerations you should have when setting out a financial plan is building an emergency fund.

The fund will help should there be any unexpected expenses that could put a dent into your finances, be it small or large. Examples could be redundancy, a major housing disaster or even a global viral pandemic that cripples business finances for an unexpected period of time (!). It will also give you some peace of mind that you would not need to take on any extra debt should it occur.

So how much should you put away for emergencies? Everyone’s personal circumstances are different, but a general rule of thumb would be to save a minimum of three to four months of income to pay for expenses, just in case.

You can start your fund with a relatively small amount and build it up.

Focus on reducing your debt

If you’ve got a debt burden, one of your key goals should be to reduce it. This is the case whether the liability is large or small; even relatively small amounts of debt can have high interest rates attached, which makes the debt much more significant than it perhaps initially appeared.

Credit card debt does have its advantages, as long as you don’t carry a balance or pay late. Of course, interest rates are very high and always more than the savings rate, so consistently carrying a balance is simply making you poorer.

Your debt may have arisen from historic school or university fees, credit card balances, payday loads etc. Often, interest rates can be so high on some of these that what you’re paying back is a multiple of what has been borrowed.

The more you pay late, the more likely your credit rating will also be hit.

To start tackling your debt, you need to understand how long it will take to pay it back. Then focus on always paying on time, pay more than the minimum payments on credit card balances and attempt to make additional payments when you can in order to reduce the remaining balance.

Bringing your debt obligations down and under control is important for your peace of mind and ability to focus on your other goals.

Invest and save

Investing is a large topic to discuss but it doesn’t have to be a difficult one.

Investing is also not just for the wealthy. It can be as simple as putting aside a small amount into a work or personal pension, directly from your monthly income.

We will cover investing in a separate post but your financial plan should include some form of investment process. That could be:

  • Investing for retirement in a government or personal pension scheme.
  • Investing in a tax efficient cash or stocks ISA.
  • Putting aside small amounts of money into a savings product.

And it is never too late to start. If you make regular contributions to your pot, whether that be automated via a direct debit or not, it can increase faster than you may think.

The difficulty is choosing the right savings product for you. According to Close Brothers, only 40% of employees are confident that they will pick the right savings products for their needs. So, financial education is really important here.

It often comes down to your goals, when you wish to achieve them by and the risk you’re willing to take in your investments.

For instance, achieving a short-term goal by investing in a tax-free vehicle such as a cash ISA may be appropriate as there’s no risk that your savings will reduce in value. But with interest rates so low, it may not grow much either.

Investing in a stocks and shares ISA could be better for a longer-term goal, with the potential for a higher return but this comes with the additional risk that the value of your savings could fall as well as rise.

Monitor your performance

As I stated at the start, setting up a financial plan isn’t a one-off event.

As you progress, the timing and impact of other events, along with your financial results may also mean that you need to adapt your plan. What was right for you at the start may not be right for you in the future.

You may also achieve your goals earlier than expected, which may mean setting new ones and incorporating different products into your plan.

Don’t forget, getting additional and regular financial advice if you’re unsure of what you are doing is always advisable and can often help you to remain on track. This could take the form of a Robo-adviser, which tend to offer low-cost, simplified online investment management, online virtual access to human advisers or specialised face-to-face guidance with a qualified portfolio managers.

This document is Marketing Material for a retail audience and does not constitute advice or recommendations. All content and views are solely those of the author and are for informational purposes only. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

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