Financial planning – unlike the products associated with it – doesn’t need to be complex. Joe Swanson, an independent adviser at AFH Wealth Management, looks at what you need to be thinking about when it comes to your financial plan.
Whatever the catalyst to getting your finances in order, be it a New Year’s resolution, impending retirement or receipt of an inheritance, there are some core principles that can guide and support you when addressing your financial planning needs.
Defining financial needs and priorities can be difficult when there are so many things to consider. In addition, your priorities will most likely change over time as circumstances develop.
A good way of focusing is by using the ‘PIMPSI’ prompt to identify the core financial planning areas that need attention. Below is an explanation of ‘PIMPSI’ and how it could be used to help you structure and prioritise your financial planning needs.
P is for protection
One of the first objectives of financial planning is to ensure you have adequate protection to meet unforeseen life events. Protection can be in the form of easily accessible cash savings or traditional insurance products and can provide a safety net in the event of redundancy, sickness or death – all of which will impact your finances and those who are financially dependent upon you.
If you’re employed, consider what benefits your employer provides and whether they’re adequate to meet your protection requirements. If you don’t have enough protection to cover any debt you hold, and/or around three months’ expenditure, protection is the area you should consider starting with.
Equally, if you have no debts and no financial dependents, consider the value of any existing insurance products you have and what they’re in place to achieve – your resource could be better directed elsewhere.
I is for income + expenditure
You may think this is out of your control, but understanding the balance between your income and outgoings is truly empowering. You may find that you have a surplus you were unaware of, which can be put towards future savings. Often, the ‘it’s in my bank account so it gets spent’ approach to financial planning is common. Likewise, if you find that you’re regularly overspending, you’ll need to carefully restructure your habits to ensure you reverse this trend.
It’s also worth considering how you get remunerated. The self-employed and business owners have great flexibility regarding how they take remuneration that could help save tax. Equally, many employers offer tax-efficient schemes that could help your income go further, such as childcare vouchers, cycle to work schemes and discounted retail schemes which should also be considered as part of your financial plan.
M is for mortgage and debt
Being in debt is increasingly becoming a way of life in the UK, starting earlier than ever before and continuing later into life. Debt isn’t intrinsically a bad thing, and can be used intelligently to maintain flexibility in your financial strategy.
For example, over the long-term, taking out a mortgage could prove better value for money than buying property with cash, as it may allow you to benefit from rising house prices without tying up a large amount of capital. (That said, using debt to speculate on property for short-term gain also magnifies your losses if house prices fall).
Ultimately, it’s about making debt work for you, rather than you working for your lender. It’s rarely beneficial to approach retirement with significant levels of debt, and paying off mortgages at this time will usually be a priority.
Also, consider the impact of student loans on your financial plans and consider restructuring any high-interest debts you have. Review your loans regularly to ensure you’re benefitting from the best rates on the market, and wherever possible, put in place a plan to ensure you can enjoy a debt-free retirement.
P is for pension and retirement planning
Whatever your stage in life, retirement planning should form an integral part of your financial plan. Understand what you have in place currently, consider your likely outgoings once you stop work (this will be easier if you have gone through step ‘I’, above), and determine if there’s a gap between what your current retirement investments can provide, and what you expect your outgoings to be. Don’t forget to include any state pension entitlement in your calculations – and remember, pension income is taxed.
S is for savings
There are many reasons to save: school fees, a deposit for a property, a holiday of a lifetime; or if you’ve identified a gap in step ‘P’ above, you should look at your savings options to fill that gap. Creating a savings habit is an excellent discipline: understand what you’re saving for, the target amount and length of time you can commit to.
There are many online calculators to support you with this and the right savings product will be defined by your objectives. A financial adviser could help to explain this further and make recommendations based on your circumstances.
I is for investments
If you’ve saved and accumulated a pot of money, or you’ve received a lump sum – an inheritance for example, or the tax-free lump sum from your pension – it’s important to ensure this is invested in the best way possible to meet your needs. Consider what your objectives are for the investment, and how long you’re prepared to commit for.
Consider if you’ll need to access the cash in an emergency, or if you can leave it with the objective of obtaining longer-term growth to counter the effects of inflation. Also, consider where the investments are currently held, whether they’re invested tax-efficiently and what charges are being levied on them.
Also, most importantly, consider if the funds in which your money is invested are correct for your needs. Financial advisers take this element of investment planning very seriously. We start by carrying out a risk assessment to determine your attitude to risk and capacity for loss. We will then ensure to allocate your capital according to your individual risk profile and long-term objectives. This means ensuring funds are spread across a diverse mix of asset classes, geographic regions and market sectors. It also means choosing funds that do what you need them to – be that to generate capital growth or a regular income.
Getting your finances in order can be difficult, as your needs will continuously change. The ‘PIMPSI’ framework can help you prioritise these needs effectively by structuring your finances to provide flexibility and financial resilience – ultimately empowering you to make better long-term decisions.
Subscribe to our newsletter
Enter your email address to receive the AFH Wealth Management newsletter.