Why is Financial Planning Important?

Since income is central to our lives, from the cradle to the grave, it makes sense to make financial plans and adjust them when required. Before we look at the different elements of a financial plan and their role in your life, it is essential to recognise this is as much about protecting wealth as creating wealth. 

This puts the subject of financial planning into context, so now we will look at the benefits of making long-term financial plans.

Financial goals

Many people automatically assume that financial planning is focused on the endgame, retirement and your life in retirement. While this does play an important role, there are many other stages of your life where financial planning will be crucial. This might include your first venture into the property market, stock market investments, further education, pension, or starting your own business. 

The key to financial planning is to set achievable goals and targets but not necessarily all low-hanging fruit. As you hit specific points in your financial plan, you can tick these off, feel a sense of achievement and then focus on the next one. Your financial adviser will be able to balance short-term financial goals against long-term financial aspirations. In effect, this is your financial journey, start and end points, and stop-off points in between. On occasion, you may need to make a diversion!

Income management

Income will be the central plank of your life, therefore, this must be managed correctly. The most common type of income is from employment, although you may have investments, inheritances and other income streams. Balancing your living expenses against long-term investments/savings is not easy, but it will become clearer as part of a long-term financial plan.

Advances in technology now allow you to stress-test your income and finances over the next year, ten years or 40 years. Cash flow analysis can identify areas of weakness, areas of strength and ways in which you can divert income elsewhere to create a broader, more stable financial platform for the future. Without being pessimistic, it is crucial to consider several different scenarios, from the dream path to the more challenging routes.

Controlling your budget

Having a degree of discipline regarding finances is vital, especially with everyday budgets and expenditure. Unless you create a physical budget, it is difficult to appreciate the financial pressures in some areas of your life and the potential knock-on effect further down the line. Financial discipline will allow you to track your expenses, stick to a budget and avoid living from payday to payday.

Even though saving for retirement may be the ultimate goal, ensuring that you have sufficient finances to live today is essential. There may be situations where you have to redirect long-term financial savings to cover budget shortfalls today. It is all about balance, knowing your expenses, income and a viable budget.

Risk management

Many assume that financial planning will focus on investments, property and other assets. It is crucial that financial planning incorporates all aspects of your financial life, including income, expenditure, investments, as well as long-term savings and pensions. This may also involve the creation of an "emergency fund", which would provide finance for unexpected situations. In effect, a short-term insurance policy.

On the subject of insurance, this will play an integral part in any financial plan. As we alluded to above, financial planning is as much about wealth protection as it is about wealth creation. Life insurance can be used to cover debts such as mortgages, leaving your partner and family debt free on your death. Income protection would also replace regular income if you couldn't go to work due to injury or illness. This is a topic on which your financial adviser will be well-versed and able to recommend a specific structure for your situation.

Wealth management

Wealth management is an integral part of any financial plan, a detailed consideration of your finances, assets, investments and plans for the future. Diversification will feature promptly as your adviser looks to maximise your income/returns while protecting your capital. The ultimate goal is to create a retirement plan to fund your life after work. 

In the early years, your investments may be focused on growth, switching to a balanced approach in midlife and then a more significant element of liquid assets in retirement. Many people also forget that you still need a degree of investment growth in retirement to produce the funds required to live. The Consumer Duty regulations, brought in by the FCA, will oblige advisers to consider post and pre-retirement finances – a welcome development.

Tax planning

Tax planning is a critical area of your finances. Actions taken or not taken today could have enormous consequences further down the line and significantly impact your income. There is a lot to consider, from retirement planning, estate planning, and managing income tax liabilities to the use of tax-efficient investment vehicles. The value of a financial adviser is further enhanced because tax regulations are tweaked, withdrawn, and new ones introduced far too regularly. You need to be up-to-date, up to speed and ensure you manage your tax liabilities appropriately.

Summary

A financial plan is a roadmap which covers all aspects and changes in your life. Maximising returns while protecting capital, addressing tax liabilities, and providing sufficient funding for living expenses, it can be challenging. The focus tends to be on long-term goals, but short-term targets give a feeling of progress, all the while embracing a flexible and open-mind to change. As you can see, there is a lot to discuss with your financial adviser.