In simple terms, Financial Planning is an ongoing process to help you make sensible decisions about money that can help you achieve your goals in life.
It’s not just about buying products like a pension or an ISA, but a more comprehensive assessment of your current and future financial position.
Whilst some of the assumptions underpinning a comprehensive Financial Plan can be quite complex, Financial Planning is a relatively simple tool.
Despite this inherent simplicity, Financial Planning doesn’t work for everyone.
Here are seven reasons your Financial Plan might not be working, and the steps you can take to fix it.
1 – You didn’t clearly define your goals
Setting clearly defined goals is a really important part of the overall Financial Planning process, as this step forms the direction your plan. It also helps to define the success or otherwise of your plan.
In order to achieve your goals, these need to be clearly defined in terms of timescales and the financial costs involved. Without this clear definition, it is difficult to know how to allocate your financial resources in the future.
When constructing your Financial Plan, don’t rush this goal-setting step. Take the time to properly articulate your goals and make them SMART – specific, measurable, achievable, realistic and time-bound.
2 – You’re not sticking to a budget
Budgeting is what creates the gap between your income and expenditure, allowing you to allocate this surplus income towards future goals.
If you’re overspending compared to your budget on a regular basis, you won’t have this spare money available to achieve your financial goals, and your Financial Plan won’t work.
If you struggle sticking with a monthly budget, consider budgeting on a week-by-week basis and paying more attention to your regular spending habits.
3 – Your partner hasn’t committed to the plan
It takes two to tango, and it takes both partners in a relationship to make a Financial Plan work.
There’s nothing wrong with having different financial dreams, but as a couple you will need to agree on a common set of goals and how your overall financial resources are to be allocated to achieve future goals.
You can start the Financial Planning process as an individuals, but before too long you should sit down together and work as a team to create a Financial Plan on which you both agree.
4 – You made wildly inaccurate assumptions about the future
When we construct lifetime cash flow forecasts, we have to make a series of assumptions about what might happen in the future. These assumptions include things like investment growth, price inflation and mortality.
If any of these assumptions are significantly different to how they turn out in the future, it can result in a very different outcome in the future to the one you originally forecast.
To avoid this from happening, it is better to make slightly pessimistic assumptions. For example, if price inflation has been an average of 2.5% a year for the past decade, consider using a 3% a year inflation assumption instead.
Another way to control this assumption risk is to keep your Financial Plan under regular review. You can keep your assumptions under review each year and make adjustments as necessary.
5 – You overcomplicated the execution
An unexecuted Financial Plan is a bit like a high performance sports car without an engine. It is often an investment portfolio which drives your Financial Plan, but this execution can be easily overcomplicated.
Rather than picking a complex investment portfolio packed full of multiple stocks or holdings, and a handful of esoteric ideas, keep it simple and stick with tried, tested and proven investment portfolios.
There is a growing movement towards the use of low-cost index tracker funds which broadly track a selected investment index or asset class. These can play a role in a simple investment portfolio which does what it says on the tin.
6 – You didn’t listen to your Financial Planner
Your Financial Planner is there to help you avoid making the mistakes which can derail your plan.
A big part of the value offered by professional Financial Planners is behavioural coaching which helps investors avoid taking irrational investment decisions, often driven by emotion rather than logic.
If your Financial Planner advises you to follow a particular course of action, and assuming you understand their reasons for the recommendation, then following it will help keep your plan on the right track.
7 – An unexpected catastrophe derailed your plan
We sometimes refer to these as ‘black swan’ events; a term popularised by finance professor and author Nassim Nicholas Taleb. A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict.
When you build your financial plan, it’s important to consider a variety of disaster scenarios, including the impact of death or disability on your ability to achieve your goals. You can then consider putting in place suitable forms of life assurance or other financial protection to negate these risks.
Unexpected catastrophes can, however, derail your plan unless you also make some contingency for the unexpected and unpredicted.
One way to deal with these unexpected catastrophes is to maintain a cash emergency fund which is easy to access to deal with such events. You could also consider keeping an element of your investment portfolio in liquid and accessible holdings, just in case you needed access in the short-term.
As a firm of Chartered Financial Planners working with clients to remove stress about money by offering a clear explanation of your choices and options, we want the Financial Plans we construct to succeed.
By understanding the factors which can result in the failure of your Financial Plan, you can take steps to deal with them before they become a problem.
