What Is Financial Planning and Why Everyone Should Have A Financial Plan

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Introduction

When we talk about financial planning and financial plans, most people assume that we are just talking about pensions or investments or some other financial products sold by an insurance company.

In this article, we will look at what financial planning actually is and why having a financial plan is so important.

What Is Financial Planning?

Most people go through their working lives accumulating various pension policies and investments without really considering how these can be used to fund their future lifestyle.

They might also build up a large cash balance because they spend less than they earn. They might have sold a business or inherited some money yet they haven’t considered what their future lifestyle might look like.

Financial planning is understanding what the money is for and for most people this means:

Having clarity around their current financial situation.
Achieving financial security.
Attaining financial independence.
Achieving and maintaining their desired lifestyle.

The Discovery Process

Finding out about a person’s lifestyle is hugely important as it is something unique to them and their family.

Understanding the lifestyle they have now and the lifestyle they want to have in the future forms the back bone of the financial plan.

It is also important to understand what a client wants to achieve with the rest of their life before they lack the health or the energy to do those things.

It is crucial to ask the right questions and to take the time to explore this with the client. Often this is the first time they have been asked these questions and they need time to think.

Building The Financial Plan

The next step is to build their financial plan. This helps to determine where the client is now, where they want to get to and what needs to happen to help them get there.

Typically, the financial plan is looking to answer the big questions such as:

When will we have enough to be financially independent?
Will we have enough to maintain our lifestyle both now and in the future?
Do we have enough to achieve our goals which may involve helping our children and grandchildren?

To do this we need to analyse a client’s income and expenditure and their current assets and liabilities.

With this information and using conservative assumptions, we can produce a lifetime cashflow forecast to determine when they might achieve financial independence i.e. when a client can afford to work only because they want to rather than because they have to.

We can also model different scenarios, for example modelling different retirement ages. We can model the impact of a significant capital expenditure item, for example buying a second property or modelling the impact of spending several months a year on holiday.

We can look at catastrophe scenarios, in other words what would happen to the family’s finances in the event of death or being unable to work.

We can also look at the impact of a significant market correction on the overall financial plan.

An Iterative Process and the Need for Regular Reviews

A financial plan is not a one-off event but is something that is regularly reviewed and updated to take into account changes in a client’s personal circumstances, changes in the economic situation and regulatory or legislative changes.

As people accumulate capital and move towards retirement so we ensure that they are saving enough, investing appropriately and taking advantage of their various tax reliefs and allowances.

As they transition into retirement so we can model how their spending impacts their cashflow forecast. We can ensure that client’s spend more in the active phase of their retirement so they can make the memories they can look back fondly on in later retirement.

We can then design an estate planning strategy to ensure wealth is transferred as tax efficiently as possible to future generations whilst still maintaining their lifestyle.

It is vital that the financial plan is regularly reviewed and updated to ensure that clients are on track to achieve their desired lifestyle.

Case Study #1 – Investment Banker

I worked with an investment banker who was in his early fifties with a salary of around £1m which included a bonus of cash and share options. The family home in London was worth several millions and the family had a fantastic lifestyle.

The issue was that the client wasn’t saving enough to maintain their lifestyle into the future. Their expenditure included school fees for four children, mortgage costs, three cars as well as lavish holidays. Any surplus income was generally spent in a classic example of lifestyle creep.

We designed a savings strategy designed to ramp up significantly as the children finished their education and the mortgage payments came to an end.

The financial plan provided the clarity that the clients needed around their current situation and a strategy for moving forwards towards achieving their future desired lifestyle.

Case Study #2 – Law Firm Partner

I also worked with a partner at a law firm who was approaching retirement having accumulated around £2m in various pension policies and investments. In his view, he and his wife had accumulated enough and thought that drawing down around 4% a year would provide sufficient income for them in retirement.

We built their financial plan and were able to demonstrate that £2m was indeed sufficient, however, a 4% withdrawal rate didn’t meet their desired lifestyle, particularly in the early years of retirement. We were able to demonstrate that they could afford to spend much more in the first several years of retirement achieving their desired goals of increased travel and home refurbishment. Once their State Pensions kicked in, they could ease back on the withdrawals from their accumulated capital.

We were also able to design an investment strategy for them which continued to take sufficient equity risk whist ensuring there was sufficient cash to meet their income requirements should markets fall.

Implementing The Strategy

Financial planning is where the value lies. The discussions we have with our clients are truly life-changing enabling them to focus on their dreams and aspirations for the future.

Coming out of the financial plan will be the various action points which may include:

Consolidating various pension pots.
Creating a regular savings strategy.
Using pension and ISA allowances.
Ensuring that assets are split tax efficiently across spouses.
Ensuring sufficient life cover is in place as well as other protection policies.
Creating an income strategy to ensure that retirement spending can be met.
Designing a gifting schedule as part of an estate planning strategy.

The financial plan is the blue-print and the pensions, investments and financial products are simply the building blocks.

It is noticeable how many large national advice firms focus on investment management and seem to focus all of their attention here. I have even seen firms that claim to offer the financial planning for free and yet charge an extortionate initial fee for placing the investments.

When Should You Have A Financial Plan?

The simple answer is that a financial plan will be beneficial for you at any time although most people won’t know that they need a financial plan. Often their focus will be on a specific area, for example their pensions, their investments or they want to save some tax. This is where much of the industry is focused as this is where they make their money – by selling you investments and products you may or may not need.

It is often a good idea to seek clarity around your financial situation when approaching a milestone in your life. For example:

A professional athlete reaching the end of their playing career and wanting to plan for their future lifestyle.
A successful professional in their late forties or early fifties seeking clarity as to their current financial situation and putting in place a financial strategy to achieve their future goals.
A business owner contemplating the sale of their business and wondering whether the sale proceeds will be enough.
A successful professional several years away from retirement looking for clarity around whether they will have enough to live the lifestyle they want.
An actor, musician or influencer who has achieved some success and is looking to ensure that their money is working hard through the peaks and troughs of their career.
Those who have just retired and are wanting clarity as to how much they can spend without running out of money.
Those in later life with significant assets looking to pass their wealth on to future generations as tax efficiently as possible whilst ensuring that their lifestyle is maintained.

The vast majority of people find the financial planning process extremely helpful and the biggest comment I tend to get is, ‘we wish we’d done this sooner’.

Who Should You Engage to Design Your Financial Plan?

Knowing who to trust to help you with your financial planning can be incredibly difficult. The financial advice ‘industry’ has a huge trust problem and financial advisers are generally as well regarded as double glazing or used car salesmen!

A relatively new financial planning ‘profession’ has emerged over the last 15 to 20 years which focuses on the client rather than the client’s money.

Therefore, look for a firm which puts financial planning at the heart of what they do and look for a financial planner with the CFP ™ qualification as this demonstrates a commitment to the highest professional standards.

Conclusion

A financial plan provides clarity and peace of mind that you are on track to achieve your desired lifestyle. It means that you don’t have to worry about what happens to investment markets in the short-term as long as you know that your longer term objectives are on track.

It means that you don’t have to worry about where to invest future monies and what financial products you need to use. The plan is the blue print and the underlying products and investments are just the building blocks.

Having a financial plan removes much of the financial stress leaving you to focus on living the life you want.