A Guide To Financial Planning For Normal People

Financial planning is an important part of wealth building. Budgeting and finding ways to save money is one thing, but in order to secure the future that you want, you need to plan your finances and invest your savings wisely.

Financial planning sounds complicated, but it doesn’t have to be. So with that in mind, I decided to write this very rough guide to what it is and how to do it:

What Is Financial Planning?

Well you can plan for whatever you like, but the idea is generally to plan for your future. For most people this means planning for retirement – since that is generally the final period of your life, and the one where you most want to be secure.

For the sake of this article we are going to assume that financial planning means planning for the big financial events in your life. This may mean:

  • Planning for your pension
  • Planning to pay off your mortgage
  • Planning to pay for University

financial planing guide

Ok, So How Do I Plan?

The first step is to figure out what you need. You can’t plan a journey if you don’t know your destination. So let’s talk about a simple strategy for figuring out what you need in the future. It is also a good idea to understand the legal and tax issues surrounding retirement. Obviously, pensions and tax are regularly reviewed and adjusted, so staying up to date is key.

How much will you spend?

It’s impossible to know how much you will spend when you retire, but you should be able to at least make a reasonable estimate. If you don’t already, I recommend you start tracking your expenditure now so that you can see what you currently spend. This will help you to think about what you might spend once you retire.

It seems a long way off, but you can probably make some assumptions:

  • Hopefully you won’t have a mortgage to pay
  • You will have also cleared any other debts
  • You may only need one car, and your fuel costs will be lower
  • What do you plan to do with your free time?

Most retirees spend a lot less than they did when they were younger. But you should think about the cost of the activities you hope to pursue with your new found free time.

Try to come up with three figures:

  • How much you need to survive (worst case scenario)
  • How much you need to live comfortably
  • How much you need to live your dreams

Setting A Savings Goal

Once you have a target retirement income, you can think about how you will produce that income. If for example you expect to spend £2,500 per month once retired, how will you produce that income?

It’s a good idea to spread your investments between a few different vehicles, such as:

  • Property (rent + capital gains)
  • Investments (stocks and shares)
  • Cash (ISAs)
  • Annuities

How you invest your money should depend on your attitude to risk and your needs. But it is a good idea to get a feel for the potential returns each of these strategies can produce. You can then use that to work out how much you need to accumulate in order to retire.

This will also depend on when you plan to retire and how long you expect to live of course!

One quick and easy way to get a very rough estimate is to use an annuity calculator, to work out what amount of money would be required to buy a monthly income of £X.

Plan Your Savings Journey

Ok, so you know when you want to retire, you know how much you need to have accumulated in order to retire. Let’s work out what you need to save!

This part is simple enough. The first step is to work out how long you have got. If you are 35 now and you want to retire at 55 (that’s a nice target) you have 20 years to save.

From there, you can run a few test scenarios to figure out how much you need to save each month in order to reach your goals. This should take into account how much you have saved already. For very simple estimates I tend to ignore mortgage debt, since you are already paying your mortgage each month anyway.

Just remember that your savings target is over and above your various debt payments. Also of course, you need to ensure you are on track to pay off your mortgage by retirement!

What About Inflation?

It’s hard to predict inflation, but you do need to try to account for it. The figure you came up with for a savings target is of course in today’s money. But if you adjust for inflation you will find you actually need to save more. This is an important consideration and a part of your financial planning.

Here’s a simple inflation calculator that will do the maths for you. Obviously no one knows what the rate of inflation will be over the next 20 years, but you can see what it was over the past 20 years to at least get an idea of what it might be.

What Did I Miss?

What else do you think about when planning for your financial future? This article is an overview, but there are lots of other bits to think about too. So tell me what I missed.

 

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