Your plan outlines your spending, financing, & investing to optimise your financial situation. Our experts recommend following this six-part process to develop a robust plan for the future of your finances.
Creating your financial plan will help you to feel confident in your financial decisions, big and small. There are six stages to formulating a financial plan, typically as outlined below:
It is important to get a clear view of your current financial situation, and this is the first step to developing your financial plan. To achieve this, follow these four basic steps ...
Create a list of your current assets & liabilities so you can calculate your net worth. Organise your financial records, and track your income and expenditure. Assets are things of value that you own such as cash in bank, property, vehicles, investments, etc, while liabilities are amounts that you owe such as loans, credit cards, and tax etc.
To calculate your net worth simply total up the value of your assets and then subtract your total liabilities. Your current net worth will give you a clear view of the starting point for your personalised financial plan.
For future planning getting your financial records straight is important. Therefore, you should create a personal filing system for all your financial documents, such as bank statements, insurance policies, receipts, wills, property title deeds, mortgage statements, tax returns, and any other financial documents that you may have.
Recording and tracking your income and expenditure will help you get a clear view on how you currently spend your income. This will be helpful because it will reveal the financial behaviours that have led to your current net worth and show the opportunities available for improvement.
Personal financial planning is all about goals. Think about what kind of lifestyle you wish to have now, in the near future and in the longer term ...
Once you have defined your lifestyle aspirations you can then create the goals necessary to achieve to achieve them. Also take into account that some of your goals may contribute to (or restrict) further goals in the longer-term.
To be effective it is important to set goals that are specific, measurable, realistic, and achievable. It is also vital that your goals are time-based with clearly defined deadlines.
Think about how you feel about what’s financially important to you, and consider how you balance risk and reward. This will enable you to formulate and prioritise your financial goals accurately.
If you have a partner or a family you should bring them into the conversation, and rather than having a personal financial plan formulate a ‘family’ plan. Doing this will help make sure your values and your goals are commonly shared within the family. You may realise that your priorities are different to each other, so engage family members so that you can reach agreement of compromise so that you all feel comfortable about your shared financial future.
A goal of backpacking across Australia may not seem like a financial goal as such, but naturally you’ll need financial resources to make such a trip. Likewise, you may also have intellectual goals such as furthering your education or progressing your career. Also consider your lifestyle goals, such as what kind of pastimes or hobbies you wish to pursue. Each of these considerations should ultimately take into account the kind of lifestyle you wish to achieve during retirement so that you can set the best financial planning goals for you and your family.
Study all available options to meet your goals. Determine whether on goal will impact another and also remember that the same goals can often be met in different ways …
In general, your options will fall into one of two categories. These will either be the utilisation of current resources in alternative ways, or generating a new of additional income. For each of your financial goals you should consider either continuing the same course of action, improving it, or taking alternative of additional courses of action.
For example, to save money for your Australian backpacking trip, you may need to cut back on fine dining in expensive restaurants for a while. Alternatively, you may want to sell that expensive snooker table you never use anymore.
As well as identifying alternative courses of action within your financial goals, consideration should also be given to how your goals cross over or interact. For example, if a lifestyle goal was travelling around Europe every year, maybe investing in a camper van would save you money on hotel bills, and you could travel more often.
To reach the optimal combination of goals consider these four basic steps ...
It is important that you take your current life situation, your ethics and personal values, and current economic climate all into account. Weigh up how you feel about your current financial position against each of the categories you’ve considered. Do you recognise any shortfalls or deficiencies in any area, and should you give them further consideration? It’s important to remain practical throughout developing your step by step plans and avoid becoming frustrated of defeated by the overall scope of your plans.
An opportunity cost is something that you have to forego in order to achieve something else. For example, moving to a larger home, or buying that dream motorbike, may require you to sacrifice all those expensive meals out for a while.
Do as much research as possible and carefully evaluate all your information. If you were considering making an investment for example, you should pay particular attention to the relationship between risk and reward. Are the benefits worth the risks?
Remember that even after you’ve carefully completed your research and established your goals, that these can be subject to change. For example, an economic downturn can alter your choice of expenditures or investments. It is therefore important to remain flexible so that you can adjust your decisions and goals in response to other changes in the future.
The earlier you start, the better. So now that you've done the ground-work, it's time you get things started ...
Now that you’ve been able to develop your goals, identified your alternatives and carefully evaluated them, create a list of the strategies you’ve identified. Consider your current financial situation and rank your goals in order of the most realistic.
In doing so take into account your current net worth. Should your liabilities be greater than, or even close to your overall net worth consider making changes to change this ratio.
You may choose to focus on developing your net assets, but also remember that paying off debts can in itself be a great investment. Interest charges, even ones for relatively small debts will compound and can become overwhelming over time, so allocating some of your resources to debt reduction may help avoid problems in the future.
Aim for a balanced approach to short, medium, and long term goals that will give you the confidence to plan for a few months’ time, as well as in years to come. Focus on steady incremental growth that will help you keep a clear view of your financial road map, which will ensure you achieve your goals.
Don’t try too much at the same time. Be realistic, you will not be able to adopt all the strategies you’ve evaluated. Make sure your range of goals is balanced and firmly aimed at helping you achieve your chosen goals. When you achieve these goals you will arrive at points which will then allow you to take on additional projects and establish new goals.
You’ve already taken stock of your assets and liabilities, now build these into a framework that includes the decisions you’ve made. Set your budget and hold yourself accountable to it. Remember that in life things can change unexpectedly so try and keep your budget flexible, for example saving more when the suns shining so that you’re covered for those rainy days.
You may feel confident that you are perfectly capable of making financial decisions, but remember, a professional financial adviser has the advantage of emotional detachment from your financial situation. Additionally, professional advisers have the benefit of extensive product knowledge and the latest rules and regulations.
Remember, things are always changing and life can be full of surprises so make sure review things appropriately as you go along.
Personal financial planning is an on-going process. Remember that life is always changing, sometimes for the better sometimes for the worse. It will always be prudent to review and update your plan over time as your circumstances change and your needs and preferences develop.
In earlier life it may be sensible to review your circumstances more frequently, every six months or so for example. Commonly life becomes more stable as it progresses, so you may be able to reviews your position less often later as you grow older.
If you’re married, or in a committed relationship, or have a family then hopefully you’ve pursued this process openly as a couple and/or family unit. When making relationship commitments finance should be part of conversations when looking to the future.
The best pension options
Let our qualified pension experts advise on the best pension options for you & your family's future ...
Wise investment choices
all the latest products available as of April 2021 ...
Latest rates for 2020
Our qualified mortgage experts can advise on the best options ...
Plan for the unexpected
Helping you arrange the best protection for you and your family ...
Are you tax efficient?
Independent & impartial advice on tax planning products from all providers
The future is inevitable
Our needs are different in later life, and with effective later life planning we can be prepared