18th July 2024
general
When most people think of financial planning, they might think about investments or pensions. But these are simply the tools we use to work towards your goals rather than the end result.
A good financial plan combines risk management, investment planning and tax-efficiency, which are all woven together into a comprehensive strategy. Addressing one of these areas without considering the others is like going on a journey without a map – you may still get where you need to be, but it will take a lot longer and it will be easier to miss things along the way.
In this guide, we examine how the different parts of your plan can work together and why this is important.
Set Your Goals
The first step in any financial plan is to understand what you would like to achieve. Perhaps a comfortable retirement is your main goal, or you have other milestones you would like to accomplish first.
The process of cashflow planning may use some sophisticated tools, but the basic steps are quite simple:
a) Work out where you are today
b) Establish what you would like to do and how much it will cost
c) Develop some options for getting from (a) to (b), ideally in the fewest number of steps
d) Revisit the plan regularly to determine if you are still on track
Some goals are easily achievable, while others are more ambitious. By creating a financial plan, you will have a good idea if your goals are realistic or if any adjustments are needed.
Only when your goals are clear can the rest of your plan fall into place.
Address the Risks
Now that you have planned for your best-case scenario, it is also sensible to plan for the worst. Ill health, redundancy, and bereavement can derail a financial plan, creating additional stress at an already difficult time. We manage risks by putting contingencies in place, such as:
While no one likes to think about illness or death, taking a few simple steps to address these risks can prevent significant hardship further down the line.
Diversify Your Assets
A sensible investment plan is the cornerstone of any financial plan. But performance, benchmarks and quartile rankings form only part of the picture. Seeking high returns without a strategy in place can be counterproductive.
The first step in planning your investments is to understand not only the amount of risk that you can cope with but also the amount of risk that you need to take. While building up cash in a bank account might seem like a safe option, you should also consider inflation—cash is unlikely to hold its real value over the long term, especially at current interest rates.
A strong investment plan has the following features:
Save Tax
Saving tax should be a consequence of good financial planning, not a goal in itself. While certain investments can save substantial amounts of tax, they should only be considered in the context of a wider plan.
Some examples of sensible tax planning are:
Once the basics of tax-planning are in hand, it can sometimes be appropriate to use more sophisticated strategies. Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) offer substantial tax benefits, although they come with added risks.
Give to Others
Providing for a family or leaving a legacy are important financial goals for many people. By incorporating this into your financial plan, you can ensure that more of your money ends up with those you intended. For example:
A financial plan should put your goals first. It is only when all the different aspects work together that the best results can be achieved.
Please do not hesitate to contact a member of the team to find out more about financial planning.