What should be in your comprehensive financial plan?
Your plan should address each of the following areas, preferably in this order, although you will alter it to match your needs:
Your goals
Go back to your goals and take the most important to you at present. Your plan will aim to achieve these over time. These goals may change in the future as your circumstances change, and as you achieve them, you will no doubt add more.
Assumptions & attitudes
Bring together all your assumptions on how the future may change your plan, using measures like inflation and investment growth.
Income
Revisit your income sources now, and use the assumptions you made to project forwards each year, calculating how much you will pay in tax and what you will be left with. This will be the basis of the future plans. Don't forget to include an assumption for how your income producing assets will grow and therefore how the income from these assets will be factored into your calculations.
Expenditure
Extrapolate how your expenses will change over time as inflation increases costs, and some outgoings change (get paid off or increase for other reasons).
Assets
Use your calculations to work out how your assets will grow in value using your assumptions, and also how you will add to these by saving any excess income into various investments.
Liabilities
Work out how you will reduce your liabilities by paying them off over time, and how this will affect your expenditure.
Emergency funds
You should aim to put aside at least 3-6 months worth of expenses in an instant access account.
Protecting what you have got
Your next priority should be to protect what you have got, should the worst happen. This can range from death to serious illness.
Paying off debt
Loosely speaking, you should pay off debts before you save for the future. Working hard at this can pay off great dividends at a later stage.
Saving for the future
Once you have all the basics covered, you can start to save for the future - meeting your goals.
Reviews
Put in a date for a future review and hold yourself to it. After all, your circumstances are likely to change.
Cash flow planning
Your plan is really about mapping out your personal cash flow into the future using what you know about your current situation, and taking account your goals. We usually break this down into 3 categories:
Not enough
If you fit into this category your current course will not be enough to achieve your desired goals. You will need to do more to reduce expectations, lower costs, earn more or put back your desired goals in time. This may seem daunting if you do not have enough to achieve your goals, but by knowing your status you will have something to work towards; surely knowing where you are going is better.
Too much
If you have actually accumulated too much this means that your family may pay too much in tax when your die. Alternatively, you may have been able to retire earlier and enjoyed more of your life rather than working. We have all heard of the people who worked their fingers to the bone for 40 years, and retired only to become ill shortly after retiring. Surely it would be better to spend more time doing the things you really want to do while you can still enjoy them, rather than wasting time accumulating money you will never need. Your plan is about showing you how much is actually enough.
Just right
You should aim to have enough in your pot to achieve your lifestyle requirements, with a bit to spare, and being cautious in your assumptions. If you can achieve this then your future lifestyle will be secure, and you will lead a happier life as a result.
Building scenarios
You can use your plan to work out what would happen if you take each course of action in your plan. This is particularly important to be able to compare where you are now against your future financial plan; also, you will want to examine how your finances will be affected by illness or death in the family.
About this Author
Dan Woodruff is a Certified Financial Planner based in Colchester, Essex, UK. He regularly writes articles on financial planning and investments aimed at UK business owners and investors. Go to http://www.woodruff-fp.co.uk to find more content, or sign up for his free newsletter or financial planning blog. Woodruff Financial Planning is authorised and regulated by the Financial Services Authority.
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