Financial planning: How to create your own financial plan

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Have you thought about financial planning?

If you’re under 40, chances are you haven’t. And even if you’re over 40, it may still be on the back burner.

But financial planning is important, and it can be hugely beneficial.

In the short to medium term, it can be used to make debt more manageable and curb your spending. In the longer term, it could help you prepare for retirement and build generational wealth.

Obviously if you have a lot of money to play with, it pays to seek financial advice, especially when it comes to estate planning and maximising tax efficiency.

You’ll be able to find financial advisers regulated by the Financial Conduct Authority on places like Unbiased*, although word of mouth is often the best.

Even if you don’t have a lot of money, financial planning is still worth thinking about. And you can do a large part of it yourself. Here’s how.

What is financial planning?

Financial planning is all about analysing your current financial situation, setting financial goals, and then finding the best strategies to achieve those goals.

So as part of that process, you’ll create a financial plan that covers every aspect of your finances and maps out your financial future (more below).

Crucially, financial planning isn’t something that you only do once – it’s something that you’ll evaluate and adjust overtime.

How often should you update your financial plan?

Because financial planning is mostly about preparing for the future, you don’t need to do it regularly at all.

Most experts recommend reviewing your financial plan at least once a year to check whether you’re still on track.

This is because your income and wealth could have changed significantly in that time. 

Your outlook on life and therefore your financial goals might also have shifted.

On top of your regular review, you’ll also want to update your financial plan when something life changing happens, such as getting married or having a child.

This applies when your finances change drastically too. For example, if you came into a big inheritance or just lost your job.

What should you include in a financial plan?

A basic financial plan should contain three things: a snapshot of your finances, your financial goals, and your strategy for achieving those goals.

For a more comprehensive plan, you might also want to include a risk assessment.

That means looking at whether there’s anything that could negatively impact your finances or derail your plan. And if so, whether you have a contingency plan in place.

For freelancers, a classic example would be taking out insurance in case of long term sickness.

How to create a basic financial plan

Assuming you want to create your own financial plan, rather than working with a professional to do it, here’s how to start.

Read more: How to choose a financial adviser

Tip: An Excel document (or similar) is great for tracking those numbers but you might also want to have a Word document for outlining those goals and strategies.

Create a snapshot of your finances

Start with a snapshot of your finances so you know what you’re building on.

I would personally split this into four pillars: Budget, Wealth, Debt and Retirement.

Budget includes monthly income and essential expenses. 

So things that you have to pay for each month like mortgage/rent and bills, rather than discretionary spends like meals out, because those can be adjusted.

If your regular expenses fluctuate a lot, you might want to take a 12-month average and use that – this is where a standalone budget tracker can come in handy.

Once you subtract your essential expenses from your income, you’ll get your disposable income. This is the money you can spend, save or invest each month.

For Wealth, tally up the value of your savings and investments. Include any property and anything of value that you can easily sell here.

Under Debt, list long term debts like mortgages, credit card debts, student loans and other personal loans.

If you pay off your credit card in full each month, you don’t need to include it here.

And if debt management isn’t one of your financial goals – for example because you don’t have any debt or you’re not actively trying to pay off your debt as quickly as possible – then you can simply ignore this pillar.

As for Retirement, obviously include your pension portfolio here as well as your LISA.

Set your financial goals

A key part of financial planning is setting financial goals, and these can be related to any of the four pillars mentioned above.

As an example:

The goals don’t have to be particularly ambitious, but they do need to be realistic and achievable.

Bear in mind that you’ll need to set short, medium and long term goals.

Your short term goals should be contributing to your medium term goals, which should in turn contribute to your long term goals, so you might find it easier to work backwards from a long term goal.

If you have multiple goals, it’s also important that they don’t clash. Or if they do, you’ll need to decide which one should take priority. 

Overpaying your mortgage or investing is an example of this.

If you need help with goal-setting, try the SMART acronym:

• Specific: Narrow down and define what you want to achieve 
• Measurable: Decide how you’re going to track progress
• Achievable: Make sure your goal is realistically doable within your time frame
• Relevant: Set goals that align with your long term objectives
• Time-bound: Give yourself a deadline to achieve the goal

Come up with strategies

Once you have your goals, you’ll need to come up with at least one strategy for achieving each goal.

Of course, in some cases one strategy will benefit multiple goals and that’s OK.

Going back to my previous examples for goals, you strategies might look like this:

Do a risk assessment

The financial snapshot, goal setting and strategising are core to a financial plan, but there are other things you could look at too.

One of these is a risk assessment of your overall finances.

Here, you’re looking at things – losing your job or getting into an accident for example – that might have a negative impact on your finances.

The idea is that you’ll then come up with ways to overcome these adversities.

It might mean having an emergency fund, or taking out relevant insurance.

Maximise your tax efficiency

Maximising tax efficiency isn’t about dodging taxes – it’s about taking advantage of government policies that allow you to legally pay less tax.

The ISA is a great example of this, but it could also be things like tax credits.

If you have significant wealth, it’s worth consulting a specialist financial adviser here, especially where estate planning is concerned.

Estate planning

Estate planning isn’t just a fancy word for inheritance. It includes everything from the preparation of a will to the power of attorney.

Being prepared here means your loved ones won’t have to wrangle with extra paperwork and legal issues, such as applying for probate, should you suddenly pass away.

And of course, you can be more efficient when it comes to inheritance tax.

Estate planning should really start from the moment you get married, have children or acquire significant wealth (including property).

Essentially when you reach a stage in life where your death will have a financial impact on others.

Review and adjust

Once you’ve created a financial plan, set a date to review it.

That’s when you’ll have the opportunity to fine tune your plan, and update it with new goals or change your strategy if your previous ones didn’t work.

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