Completing a financial plan for any project is essential, let alone your own personal plan, and the first part of that task is to actually start it. John Lowe of Money Doctors shows how to do it in just 15 minutes.
I used to be a dreadful worrier (stick with me on this, it is relevant). I would lie awake at two in the morning asking myself where I had gone wrong and a voice would answer back: 'This is going to take more than one night.’ Then I had the good fortune to work with a successful entrepreneur who, for the purposes of this article, I shall call Peter, because that happens to be his name.
The thing I noticed straight away about Peter was that he had elevated list-making to an art form. Before he wanted to achieve something important – start a business, raise millions of euro a year for charity, launch a takeover – he would prepare a list of all the different steps involved.
I copied his method and, although I cheat (I often write down things I have already done for the satisfaction of being able to cross them off), I have found that the simple process of listing has dealt a deathblow to my nocturnal fretting.
What does this have to do with the subject of planning? If more people realised that financial planning was nothing more than a bit of glorified list-making, they might be keener to take it on.
What a financial plan will do for you
I’ll cut to the chase. Financial plans are powerful amulet. This is what a good, well-executed financial plan could do for you:
- Wipeout all your personal debts.
- Help you pay off your mortgage early.
- Make sure you never have to borrow again.
- Help you build up plenty of savings.
- Ensure that your money achieves the highest possible return.
- Give you enough money to retire early.
- Protect you and your dependents against financial hardship.
- Offer financial freedom.
- Make you wealthy enough to never have to worry about the future, whatever it may bring.
Think I am overpromising or exaggerating? If anything, I am erring on the side of caution. A good financial plan can make you invincible.
Financial planning in a nutshell
What exactly is a financial plan? Perhaps the easiest way to explain how they work is to use an analogy:
If you were driving from Copenhagen to Zagreb – heaven knows why, but you are – and you don’t have one of those wizard satellite navigation systems, you would not choose a road at random and hope for the best, would you?
No, you wouldn’t. You would plan your journey. If you encountered diversions, you would get out the map and decide on a new route. Throughout the journey, you would check on your progress.
Your financial plan should have the same qualities. That is to say, it should help you reach your destination, make your journey as fast as possible and stop you from wasting time, energy and, of course, money.
Most financial products are bought on a one-off basis. Suddenly you need a mortgage or you fall into the clutches of a life insurance salesman and, bang, you are making major financial decisions before you have time to think. The result is that you may not get the best product for your needs... or the best value.
Every major financial decision you make should be part of an overall plan. Thus, a particular product, such as a mortgage, loan, insurance policy or investment, should be judged not just on its individual merits but also in terms of how it moves you closer to where you want to be.
Dream, dream, dream, dream, dream, dream
The Everly Brothers had a point. Dreaming has a huge role to play in financial planning. Consider what you'd like to be doing in, say, five years, ten years and twenty years. Consider what work (if any) you’ll be doing, where you’ll be living and how you’ll be spending your leisure time. What will your family situation be like? What – and this is key – will your financial situation be? Once you have a clear picture of the future life you’d like to have, you can start expressing it in financial terms and working out how to get there.
Setting your financial objectives
Once you have an idea of how you want things to turn out, you can start to think about what your precise financial objectives are. Obviously, these are going to vary according to your age, circumstances and desires. If you are in your first job, you are going to be thinking rather differently from someone who is approaching retirement. Therefore, you may find it useful to divide your financial objectives into the short, medium and long term.
Let me give you a simple, real-life example:
Paul is 29. He is a teacher. His short-term financial objectives are to get rid of his credit-card debt (leftover from university), start building up some savings and buy a car. His medium-term objective is to buy a home. His long-term objective is to earn some extra income with which to boost his pension, since he has decided he wants to retire when he is 55.
Setting and prioritising your financial objectives is hardly rocket science, as you can see. Checklist to help you decide what you want:
What should your financial objectives be? Here are some options:
- Having an emergency fund to cover unexpected expenses.
- Paying off any personal loans, credit-card debt, overdrafts, store cards, hire purchase, leases, other debts or ransom notes (just checking you were paying attention).
- Building up short-term saving for cars, holidays and so forth.
- Protecting your most valuable asset, your income, in case you are unable to earn money for any reason.
- Protecting yourself (and, if relevant, your partner) with life cover.
- Starting a pension plan.
- Buying a home (probably with the help of a mortgage).
- Saving for major purchases.
- Planning for education fees (if you have children), whether for private school or university.
- Building up your personal investments.
To this, I suppose we could add planning for long-term care, if you’re worried that your pension and/or the State and/or children may not provide for you sufficiently in your old age.
Next week, in part 2, I will give 5 useful tips in financial planning among other things.