PEOPLE frequently ask what financial planning really is. This article will outline five key benefits of financial planning. Before I take on that task though I will attempt to give a better understanding of what financial planning is to me.
I think of it as far more than simply managing pensions and investments. Financial planning is a clear and concise guide to help people meet their life goals. A financial plan is an ever evolving and comprehensive overview of current and desired financial position to help people reach their goals.
And now the benefits:
1. It brings order to your financial future
Break the taboo of money by talking to someone about it. Whether starting the conversation at home or engaging a professional financial planner talking is the first step to planning for your future and can make what once seemed a daunting prospect much more achievable. By defining your goals and objectives and putting an effective plan in place you are creating a roadmap for where you want to get to.
Financial goals should be documented, quantifiable and achievable and have a clearly defined timeframe. Crucially a financial plan should be reviewed every year to monitor progress and tweak along the way.
2.It makes saving a non-negotiable expense
Whether this is personal or retirement savings, saving a bit of today’s money to spend tomorrow should be non-negotiable. Set up a direct debit from your current account to a savings account the day after you get paid thereby treating savings like all other household expenses.
Parkinsons law tells us that expenditure rises to meet income, when you earn more money, you end up spending more money. To create wealth, we need to break Parkinsons law by setting limits and getting your savings out of your current account as soon as you get paid. If it was never there you won’t miss it.
3. Identifies the right vehicles for your savings journey
A deposit account is a short-term vehicle and should be used for money that will be spent within the next 1 to 4 years or for your emergency fund.
Money that you are saving for the medium to long-term has no place on deposit, this money should be put to work in a growth-based savings and investment account to protect and grow its spending power over time.
There is no better long-term savings vehicle in Ireland than the pension. Whether this be a personal pension for self-employed people such as our framing fraternity or the workplace pension plan that many employers offer, the pension is often underutilised and misunderstood but should not be ignored when it comes to your savings. It allows you to take advantage of generous tax reliefs to help your income last a lifetime.
4. It helps you distinguish between good and bad debt
Mortgages come with low interest rates when compared with shorter term personal debt, a key reason why a mortgage is seen as good debt.
Credit cards and overdrafts with interest rates or APR close to 20%, and short-term personal debt with interest rates or APR up to 7% or 8% is bad (or costly) debt. With savings being impacted by the ultra-low interest rates of today it makes little sense to pay the banks’ profits through high interest rates on borrowings while getting nothing back for your savings.
Get to grips with short-term debt using the debt ladder approach tackling it one rung at a time starting with the most expensive and moving through in this manner.
5. Financial planning is for everyone
It is a common misconception that financial planning is only for the wealthy. Financial planning is for everyone and can help those just starting out in working life to build and protect wealth over time. A good financial planner will help you to understand the importance of the income that will be earned between now and retirement, and the value of protecting that income for your household to get to retirement in as strong a financial position as possible.
Talking about money is the first step to taking control of your financial future. When ready engage a company that can provide the range of advice and services that you need for the long term. Look for advice that is ongoing and not just transactional in nature and be sure to ask plenty of questions along the way.
• Adrian White is a financial consultant with FDC Financial Services which is regulated by the Central Bank of Ireland.