Planning for Financial Independence

To us, getting to Financial Independence is the most important goal in life. Why? Because we define Financial Independence as having enough put aside to be able to choose to stop doing what you are doing now, and start doing what you really want to do. This doesn't mean that you need to stop working, but it means that if you choose to do so, you'll never run out of money, no matter what happens.

It really doesn't matter what your strategy is to fulfil this ambition, but the only way to guarantee that you get to Financial Independence is to build yourself a comprehensive financial plan, so that you understand how your finances interact.

Now, you may be thinking that you do not need all those financial products to do what you want, and you'd be right. Financial planning is not about products; it is about achieving the most from your life, whatever that means to you. If you know this, then you can work out a strategy to get to where you want to, while making sure you avoid any disasters along the way.

What is financial planning?

Financial planning is about building an objective plan for your financial future. You should follow these principles to ensure that every aspect of your financial life is covered, and therefore build a solid foundation to meet your goals.

Your goals will depend on your own personal situation and what you want for the future. You might want to plan for retirement, buy a holiday home abroad or send your kids to private school. The list is only limited by your imagination.

This is all based on a common sense approach. Anyone can do it, you just need to be methodical and objective.

What about financial advice?

Unfortunately, most financial advisers do not offer comprehensive financial planning. Most of them are glorified sales people. This is proved by the fact that they usually sell products rather than financial plans.

If your financial adviser starts by talking products he is thinking about his own future rather than yours!

Of course, there is a place for products, but only at the end of a comprehensive analysis of the reasons why you need that solution. What's more your financial plan might reveal that you do not need further products!

What should be in my plan?

Here are the main areas which need to be covered, in order of priority. There may be other areas, depending on your own circumstances.

Gathering data
You need to think of your plan as a whole because your financial decisions are inter-linked. For example, if you have an expensive mortgage this may impact on your ability to save for the future.

Setting goals
Without an end in mind, it will be difficult to evaluate your progress. You should think carefully about what you want your future to look like. These goals should be measurable.

Income and expenditure
This is fundamental to building your plan. If you spend less than you earn, you have a chance to affect your financial future. If you spend more than you earn you will have limited options and could spiral into debt. Understanding tax is a big part of this. A financial plan is not about having a budget. It is more about ensuring that you allocate your resources properly towards the expenditure which will work in your best interests.

Assets and liabilities
You need to build up assets to underpin your financial future, and these should the right kinds of assets. The sooner you can be debt free (unless it is the ‘right debt'), the sooner you can be in control. For planning purposes we ignore certain types of assets such as your main home, since you'll always need somewhere to live. In fact, we see your home as a liability, as it will always cost you money.

Emergency funding
It is vital that you can cope with short-term crises. You should set aside 3-6 months worth of outgoings. If you don't do this, you run the risk of using expensive debt to fund an unplanned event.

Protecting what you've got
You should think about what happens if things go wrong. This includes all types of insurance to ensure your lifestyle is defended from catastrophes. You should also consider making wills and powers of attorney etc.

Paying off debt
Generally, any debt is a barrier to your future prosperity. The sooner you become debt free, the sooner you have control over your future. Remember that your bank manager includes your mortgage as one of his assets!

Saving for the future and investing wisely
You need to work out how much will be needed to fund your future goals, how much risk this requires, and the effect of external forces such as inflation, charges and future legislation.

Tax
While this should not drive your plan, it is certainly an important part of the equation. Understanding how tax affects your life should run throughout your plan.

Monitoring your progress

You should regularly review your plan to ensure your remain on target to meet your goals. Of course, your circumstances will also change over time, so your ultimate goals may also need a tweak from time to time.

Conclusion

As you can see, a proper financial plan should be extremely detailed, and will take some work. However, the rewards will really benefit you as you will be back in control of your life.

Want some help

We work closely with our clients to develop and maintain their financial plans. If you would like some help in preparing your plan, please contact us on 01206 266882 or go to www.woodruff-fp.co.uk.