Done right, a financial plan cuts stress, improves your finances, and helps you achieve your major goals in life.
Like a jigsaw puzzle, a financial plan can have a lot of separate pieces, and different levels of detail. It can be about your values and dreams as well as practicalities.
But above all, it needs to focus on the big financial questions that are important to you – and provide you with answers for each of them.
A plan can be for a month, a year, or even longer. It can have various levels of detail, and you can take advice on it, or do it yourself.
But that’s not the most important bit. What’s important is the process of having some kind of plan in the first place: standing back, taking stock, and focusing on getting the main parts of the puzzle into place.
So what should your plan cover?
Getting the big things right
A basic financial plan should cover three key areas.
1. Family and relationships
Of course, every family is different, from single-member households to multiple generations. But many of the key questions to think about are the same.
Here are some examples.
What are the big-ticket items you need to earmark cash for over the medium term? For instance, you might want to move house in the next five years, or build up funds for college fees.
What would happen your family financially if you weren’t able to work, or if you died? Some life assurance and income protection is generally wise if you or others depend on your income to live.
For some people, this is covered through their workplace – at least to some extent. But having some cover in place, especially if you have children, is very important.
Who will inherit your wealth? Will you inherit anyone else’s wealth? Inheritance tax is heavy in Ireland, and it often makes sense to put some simple tax planning in place to minimise the costs. Writing a will is also important, and advisable for most people, in order to direct who will inherit your assets.
Retirement planning should be a major part of anyone’s financial plan.
Firstly, you need a plan for what you’re going to live on in retirement. No one is going to do it for you, and the State pension is far too low for most people to live on.
Most people have a relatively stable level of earnings, and their lifestyle is linked to that. So retirement planning is about ensuring that your earnings don’t take a severe drop when you stop working.
What’s your pension worth? Are you paying in enough for a comfortable retirement? When will you be able to hang up your boots and draw a pension?
Answering these questions takes a bit of planning. And just as importantly, the tax benefits are huge. So the sooner you get it in place the better. You can read elsewhere on this blog about starting a pension, and taking full advantage of pensions from old jobs.
If retirement is all about events that are maybe 20 years away, the lifestyle part of your financial plan is focused on your medium term.
It’s about right-sizing your finances.
That could mean a plan to pay down debt, or to increase your salary, or to start to build up an investment portfolio that will provide you with passive income that will support your goals.
Whatever your goals for the life you want to lead, there will be personal finance actions you can take today to keep on track to achieve them.
Now for bells and whistles
Now that you have covered the basic pieces of the puzzle, it’s worth thinking about any complexities of your financial situation.
That might include tax planning to reduce income tax or capital gains, addressing any vulnerabilities in your financial life, and maybe detailed cash flow forecasts and a balance sheet setting out your assets and liabilities.
Whatever shape your financial plan is in, it’s vital to remember that it’s not static.
Your finances change every day. Your plans will evolve. So your plan needs to be dusted down, progress towards goals measured, and adapted over time to help you get to where you want to be.
Read more about ways to manage your financial plan.