Creating a Financial Plan

We all want the best possible financial future for ourselves, but not enough people have a detailed plan of action to secure it.

3 min read

Creating this plan can seem overwhelming, but you can start with the following basic principles.

Setting your objectives

The first stage of creating a financial plan is identifying what you are working towards. A concrete goal will help you to choose the right strategy and stay on track.

This might be:

• Buying your first home
• Retiring early or retiring comfortably
• Saving for your children’s future
• Building an estate to be inherited by future generations
• Turning a windfall into an income

Know your budget

Next, you’ll need to take an honest look at your current finances. Total all your current income, including your salary, overtime, commission, bonuses, dividends, etc.

Do the same for your spending, split by essentials (mortgage payments, other debts, household expenses, car and travel costs, insurance premiums, medical expenses) and non-essentials (entertainment, leisure, shopping, holidays).

It should be clear if you have a shortfall or an excess. And, if you’re overspending, you should be able to see where you can cut back.

Paying off debts

Before you start to put money aside for the future, you should consider paying off existing debts. This is because the interest rate you’re paying on your overdraft, credit card, or loan is likely higher than the interest rate you would earn on your money in a savings account. So, paying off debts before saving makes more financial sense.

The exception to this rule is certain long-term debts, such as student loans and mortgages. These have specific repayment rules, meaning that it’s usually more cost-effective to repay them over the agreed loan period. However, you need to make sure you understand any penalties that may become chargeable for early redemption of these types of debt.

Building an emergency fund

Your next priority should be establishing a cash emergency fund with enough savings to cover all your essential spending for 3-6 months. You can dip into this fund to pay for unexpected expenses as they arise or, in the worst case, use it to stay afloat if you lose some or all of your income.

Always remember to top up your emergency fund as your monthly expenses increase, for example, if you move to a larger house with a bigger mortgage, or as your family grows.

Protecting your income

Accidents, illness, and redundancy (or worse still, losing a partner) are all situations we hope not to find ourselves in, but they can’t be predicted. And the financial stress involved adds to an already difficult time.

That’s why insurance is important, so at least you know your essential spending is covered. Options include:

Income protection insurance, which pays out a proportion of your monthly earnings if you can’t work because of an illness or injury (you should seek financial advice or ensure you read any terms and conditions very carefully to understand what an insurance policy does and does not cover).

Critical illness cover, which pays out a tax-free lump sum if you are diagnosed with certain serious illnesses.

Life insurance, which pays out a tax-free lump sum if the person covered dies or is diagnosed with a terminal illness.

Growing your wealth

Your next step is to think about how to grow your wealth, either by saving or investing. Saving is generally considered to be the best way to achieve goals that are within the next five years. For example, if your goal is to buy your first home, you should look at savings accounts designed for that purpose, such as a Lifetime ISA.

Investing is best for goals that are more than five years in the future. This is because you’ll need to protect your wealth from erosion through inflation. For example, if your goal is to retire comfortably, you’ll need to achieve a return that is higher than the current rate of inflation, otherwise the spending power of your money will diminish over time. You’ll also want to use a tax-efficient investment vehicle, such as a self-invested personal pension.

Planning your inheritance

A final consideration is how you’ll pass on wealth to your loved ones as inheritance. It’s helpful to start planning this well in advance to properly protect your estate from tax.

Inheritance tax of 40% is typically payable on the value of your estate over £325,000 but this can vary depending on what you leave behind and who you are passing it on to. You’ll need to be aware of your gifting allowances and other options if you’d like to pass on more than this. Professional advice from a certified Wealth Planner is always recommended when considering something as complex as inheritance tax planning.

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.

The content of this article was accurate at the time of writing. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation, and legislation after the time of publication may impact on the accuracy of the article.

The information in this article is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

Please note, The Financial Conduct Authority does not regulate advice on taxation, Trusts and Estate Planning.