To secure your personal financial welfare, you need a carefully thought-out financial plan. But what is a personal financial plan? How do you go about making one? What are the key rules? This Moneyfarm guide to making a personal financial plan will answer all those questions and more. Please read on.
| What are some of the essential components of financial planning? | Goal setting, budgeting, emergency fund, debt management, etc |
| How can a financial plan help with budgeting? | Definitely, it helps with prioritising expenses and saving for the future |
| What are the benefits of having a financial strategy? | Benefits include increased security, improved understanding, better budgeting, and control. |
| What role does investment strategy play in planning your finances? | Investment strategy helps grow wealth and achieve long-term financial goals. |
What is a financial plan?
A financial plan is a comprehensive, structured approach to managing your finances. It includes setting financial goals, creating a budget, and developing and implementing investment strategies. The aim of a financial plan is to help you to secure your financial objectives and improve your overall financial well-being.
The benefits of having a financial plan
There are several benefits to having a financial plan. They include:
Increased financial security
A well-designed financial plan can help you to achieve your financial goals and provide you with a sense of financial security. By having a plan in place, you’re less likely to be forced into making impulsive decisions or to be caught off guard by unexpected expenses.
Improved financial understanding
Creating a financial plan requires you to review your current financial situation, set goals, and develop strategies to achieve those goals. This process can help you gain a better understanding of your finances and make more informed decisions.
Better budgeting
A financial plan can help you create a budget that works for your individual circumstances. By setting priorities and tracking your spending, you can ensure that you have enough money to cover your essential expenses and also save or invest for the future.
Greater control
Having a financial plan puts you in control of your financial future. You can make better-informed decisions about how to allocate your finances and make sure that you’re on track to achieve your goals.
Peace of Mind
Knowing you have a financial plan in place can provide peace of mind and reduce stress. You can then be more relaxed in as much as you’re better prepared for unexpected expenses and have a clearer path for achieving your financial goals.
Seven Essential Components to Include When Creating a Financial Plan
A financial plan should include the following elements:
Setting Goals and Objectives
The first stage when creating a financial plan is to identify your goals and objectives. This could include things like saving for retirement, buying a home, and paying off debt. Once you’ve identified your goals, you can then set about creating a plan to achieve them.
A budget
A budget is the basis of any financial plan. It is essential for understanding your income and expenses and determining how much you can save and invest each month. Your budget should include all your income, expenses, and all debt repayments.
Emergency Fund
There will always be unexpected expenses, so you must build an emergency fund into your plan to help cope with them – things like medical bills or car repairs. It’s a good idea to allow for three to six months’ worth of such costs.
Debt Management
Managing debt is a prerequisite of any financial plan. It can easily derail any financial plan, so it’s wise to pay off debt where possible. Before considering saving or investing, you should prioritise paying off high-interest debt, such as credit card debt.
Retirement Planning
The sooner you begin retirement planning, the better. You need to think about factors such as your retirement age, your forecast retirement income, and how much you’ll have to save to achieve your retirement goals.
Investment Strategy
An investment strategy should be based on your goals, your appetite towards risk, and your chosen time horizon.
Tax Planning
Tax planning involves optimising your tax situation to minimise your tax liability. You should consider strategies such as contributing to tax-advantaged retirement accounts as well as taking advantage of tax deductions and credits.
When investment planning, don’t lose sight of the fact that your investment income can be taxable. People sometimes overlook this aspect of personal finance planning, especially when considering their long-term goals and financial planning for retirement.
While having pensions in place is essential, don’t forget that you have other options, such as investing in a tax wrapper like a stocks and shares ISA.
Estate Planning
Estate planning involves coming up with a plan as to how your assets will be distributed after your death. It can include creating a will, setting up a trust, and designating beneficiaries for your retirement accounts and life insurance policies.
Priorities change as life progresses, and your financial planning should take this into account. It means you need to review your plan from time to time to ensure you stay on track.
Financial plan examples
If you want some help with creating a financial plan, you’ll find plenty of templates online. Some you have to buy, but some are free, like the personal financial planning template on the Vennage.
How do I go about writing a financial plan for a business?
The main thrust of this article focuses on personal financial planning and analysis. Still, financial planning is important for businesses, too, regardless of whether it’s a small business or a large corporate.
Financial business planning, in terms of basics, is similar to personal financial planning. But whereas the scope of personal finance planning is usually limited to an individual or a household, a business financial plan typically covers a wider range of financial activities. It must take into consideration outside aspects, including shareholders, creditors, customers, and employees.
The methods used in personal financial planning involve budgeting, saving, investing, and managing debt. In contrast, business financial planning typically involves the financial analysis of the balance sheet, the profit and loss statement, budgeting, cash flow forecasts, and risk management.
The role of investments in financial planning
We briefly mentioned investment strategy as one of the seven essential components when undertaking personal financial planning, but it can also apply to business planning. Indeed, investments can play a crucial role in business financial planning as they can provide a source of funding for growth and expansion, as well as generate returns for the business.
The impact of taxes on financial planning
As mentioned earlier, you can avoid paying income tax on your personal investments if you use a stocks and shares ISA. However, as the term “ISA” (Individual Savings Account) suggests, ISAs are only available for individuals, not businesses.
Then there is Corporate Gains Tax (CGT), which applies to businesses as well as individual investors.
Where CGT applies, it’s important to build it into financial forecasts. It’s a crucial part of money planning as it can have a significant effect on financial goals, both personal and corporate.
If businesses have to pay CGT, they need to do their investment plan carefully if they are to minimise their CGT exposure. Individual investors have an easier option and might have to pay CGT if they invest in assets individually or as part of a general investment account. But, if you invest via an ISA, you will not have to pay CGT, regardless of how your investments perform and grow.
However, with most types of investing, there is always an element of risk. Your investments can decrease in value too. Choosing the most appropriate investor profile can help to minimise risk.
Seeking advice and guidance with your financial wealth management
It’s essential that you build in your short and long-term financial goals when investment planning. If you need an advisory service or professional wealth manager to help, don’t hesitate to find one.
When seeking help, you need to know the Financial advice vs guidance difference, as you will come across both terms if you’re looking for investment advice. They are, in effect, the same thing with a few differences.
As you journey through life, your priorities will likely change. Personal financial planning may evolve into family financial planning, and having a solid financial plan in place will be essential for you and your family’s ongoing financial health.
Some investors take the holistic financial planning route, which takes long-term financial health into account, and also encompasses other aspects of your well-being.
FAQ
When should I review and update my financial plan?
It is important that individuals review and update their financial plans regularly, especially as financial goals or circumstances change.
How does tax planning contribute to financial planning?
A good financial plan must incorporate tax planning because a good tax plan can help minimise tax liability and optimise financial decisions.
Why is retirement planning a part of financial planning?
Absolutely, the goal of your long-term financial plan should be towards retirement, as retirement planning ensures a financially secure future by setting aside funds for retirement.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
