With lockdown easing and life soon returning to an acceptable form of normality, it might be the perfect time to look at our finances and review our dreams, goals and plans for the next phase of our lives.
With nowhere to go, nothing to buy other than groceries and incidental expenses these past 15 months, the nation racked up a huge amount of savings – savings that could easily disappear as fast as they were saved. Are you planning that expensive break away, buying the latest EV car or upgrading your home? It's all money and without a plan could easily be money not well spent….
John Lowe of Money Doctors.ie gives his prescriptions on curing financial ills, taking the medicine and creating financial plans. Completing a financial plan is essential – you have no time to lose if you have not completed one already and you can do it in just 15 minutes, so this a must read.
I used to be a dreadful worrier (stick with me on this, because 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 called James.
The thing I noticed straightaway about James 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.
As someone who has elevated plagiarism to an art form, I copied him 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 financial planning? If more people realised that it is 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:
- Wipe out 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 dependants against financial hardship.
- Offer you 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.
Getting started: think holistically
Most financial products are bought on a one-off basis. Compartmentalised. 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...
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, 10 years and 20 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? 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:
Peter is 29 and a teacher. His short-term financial objectives are to get rid of his credit-card debt (left over 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 years old.
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 / dependents) 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 ungrateful children may not provide for you sufficiently in your very old age.
Five useful financial-planning tips
Bear in mind the following principles when deciding what your financial priorities should be:
1. For most people, their greatest asset is their income. Unless you are fortunate enough to receive a windfall, it is almost certainly your income that you will use to achieve your financial objectives. Under the circumstances, you don’t want to risk it and you don’t want to waste it. There are all sorts of inexpensive insurance policies designed to protect your income. Incidentally, anyone under retirement age is 20 times more likely to be unable to work for a prolonged period because of sickness than they are to die, which is why I keep droning on about income protection often being as important as life cover.
2. Personal debt, by which I mean everything from store cards to mortgages, will be the biggest drain on your income. If you’ve borrowed money (and obviously there are many circumstances under which this makes excellent sense), then you should make it a priority to repay your high interest, short term loans as quickly as possible.
3. It’s vital to have a safety net or emergency fund (RDF – rainy day fund) to deal with those little trials, tribulations and extra expenses that life often throws our way. Also, you want to make as big a return as possible from your investments.
4. If you’ve got a good, secure income, it doesn’t actually matter what other assets you possess. Emotionally, it’s nice to have the security of owning your own home. Financially, it certainly makes sense. But, actually, an investment that is just as good and maybe better is a really decent pension plan. With a good pension plan you can retire early and, if you live to 100 or more, never have to worry about money again.
5. Know yourself. There’s no point in setting financial objectives that you’re going to find impossible to attain. Your financial objectives may involve modest changes to your behaviour, but they shouldn’t require a complete change in your personality!
The surface is scratched. Write to me if you still have an itch….
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.