How To Draw Up A 4 Point Financial Plan

We all know that we need to save for tomorrow, but it’s difficult to do something about it today. Understandably, financial planning is something we tend to ignore or put off, until something serious happens that reminds us of the modern day proverb that ‘failing to plan is planning to fail’.

The latest Scottish Widows Savings report, based on an independent survey of over 5,000 people, researches UK consumers’ attitudes to savings and shows that when people face their financial fears and concerns, often with the help of a professional financial advisor, they can start to build a flexible financial plan for the future.

The highlights of the survey are:

• 12% have over £50,000 in savings
• 55% have between £1 and £50,000 in savings
• 15% don’t know how much savings they have
• 19% of people have no savings

Whilst drawing up a robust and flexible financial plan today might seem daunting, there is a potentially huge pay-back later in the form of financial security. An easy way to build and maintain a financial plan is to make a checklist of four points that should be covered.

The 4 Point Financial Plan
Your own individual plan will be unique, but once you have the 4 points written down, you can fill in the specifics and monitor it regularly. Getting started is the main thing; don’t put it off. You are bound to have doubts about some of the elements of the plan but you can use an independent financial advisor who can help make it easy for you and do the research into specific products that you don’t have the time or expertise to do.

1. Draw up a budget

First, make a simple budget that tells you what you’re earning and spending. Get into the habit of tracking expenses on a monthly basis, perhaps by keeping receipts – online and physical ones – for a period of time until you know when the bigger items hit your bank account. To manage debt levels and save effectively for your goals in life, you need to understand your cash flow.

2. Create an emergency fund

Everyone should have cash that is instantly accessible in the event of an unexpected large expense or sudden lack of income (for instance redundancy or the loss of an important client). Try to build a ‘financial cushion’ of around three to six months of living expenses.

3. Get income protection insurance

An important element of any financial plan is ensuring that you and your family can keep roughly the same standard of living in the event of death or disability. To do that, you will need some insurance policies to cover potential financial loss. Creating a bigger emergency fund would not be enough to cover the loss of your earnings if you were to die.

The moment you have dependents, then life assurance becomes extremely important. A recent study by LV= found that the cost of raising a child to 21 years of age is now £222,458. If you were to die before your children have grown up, who would pay that bill?

Health, disability and long-term care insurance can all be important, depending on your age, employment benefits (or lack of them) and dependents. Once you take out the right insurance policies, an annual checkup can confirm they still meet your needs (unless you go through a significant life change such as marriage, a child or divorce, which will immediately alter your plan).

4. Have a retirement savings plan

An employer-provided pension is one of the best ways to save for retirement, especially if there is a matching contribution from the company. But many people have a private pension; are you one of them? Whether you have an employer or a private pension, have you ever reviewed your plan? Do you know how much your pension is worth? How many pensions do you currently have?

The importance of keeping track of where your pension is, who is managing it and how much it is worth (both in terms of the current ‘pot’ and the income that the pot could buy you on retirement) cannot be overstated. It will define the kind of lifestyle you have as a pensioner.
With this 4 point financial plan, your finances should have the flexibility to change and grow with your personal situation, whilst covering you for most life events. From then on, it is more a matter of reacting quickly to any material changes in your lifestyle or goals and fine tuning the plan to meet your needs as they evolve.

Next steps
If you want to draw up a flexible financial plan but don’t know quite where to start, contact Marchwood IFA. We have a lot of experience in helping people from all walks of life – and at all stages of life – to build their own ‘4 Point Financial Plan’.