Dealing with your finances are important if you want to avoid problems in the future. Putting a plan in place will leave you in better shape for big events and those surprise bills.

What is a financial plan?

A financial plan is a way to manage your money, so you can save and invest for things like your retirement and milestones like buying a house or paying for a wedding. It can also reveal ways you can be better off day-to-day by reducing your expenses and managing debt.

Your financial plan should cover all your income and outgoings: salary, living expenses, debt, savings, insurance, tax, pensions, and investments.

Why is financial planning important?

It can give you a roadmap for your future, so you’ll have a clear idea of your goals and what you need to do to reach them.

It can save you from having sleepless nights about money by giving you a clearer picture of what’s going in and out of your accounts every month. Setting a budget will let you build up your savings or pay down debts that may be causing you stress or affecting your credit rating. You’ll also be better prepared for any unexpected financial shocks like car repairs or a broken boiler.

When should you create a financial plan?

It’s always a good time to get a grip on your finances, but it’s extra important when you’re faced with big life events or sudden changes in your personal circumstances like those below.

Planning for your retirement

Whether you’re getting close to retirement age or just starting out in the world of work, it’s important to decide how much money you’d like to have when you leave your job. You can then put a pension plan in place with investment goals to reach that figure. Generally, the earlier you start saving the better. When you’re young the monthly amount you need to pay into your pension for a certain level of income is much smaller than if you’re closer to retirement. 

Getting married or starting a family

Your big day can be an expensive affair, with the average cost over £24,000 in 2022 [1]Footnote 1 Engagements in the UK last around 20 months, so you’ll want to put a savings plan in place as soon as possible. If you’re planning on having children, a financial plan can help you budget for extra expenses like childcare, life insurance or moving to a bigger home.

Changing jobs or careers

Following a new career or switching to a part-time role could see you bringing home less money. A financial plan will help adjust your budget so can still meet your savings goals or avoid getting into debt.

Unexpected events

Unfortunately, life can sometimes throw you a curveball. Out of nowhere you could find yourself dealing with the death of a partner, serious illness or divorce. This can lead to unexpected money problems like loss of earnings, care costs or legal fees. Having a financial plan can help you cope when things aren’t quite as rosy. If you’re worried about losing your income, you could also consider income protection insurance.

Steps to creating a financial plan

Putting a plan in place doesn’t have to be daunting. Just break it down into a few simple steps. Covering these off will give you all the information you need to create one.  

1. Decide on your goals

What are your short-term and long-term financial goals? Short-term these could be clearing the balance of a credit card, building a deposit for a new home or hitting a savings amount. Long-term it could be something like putting together savings for your retirement by contributing to a pension, or paying off your mortgage so you can use the money that would normally go into your monthly repayments in other ways.

2. Create a budget

Setting a budget makes sure you have more money coming in than you’re spending every month. There are apps you can download to help track your daily spending. Or you can use a spreadsheet and enter everything you’re spending in a month.  The steps below can help.

What’s going in and out?

Checking your income is easy. That’s anything you earn regularly from things like your job, pension, side hustles, investments or savings interest.

Now it’s time to have a good look at your expenses. These can be categorised as 'essentials' and 'discretionary'. The essentials are the ones you need to pay every month without much flexibility: like rent or mortgage costs, car payments and utility bills.

Your discretionary spending covers expenses you have more choice over. It includes things like your food shopping, clothes, subscriptions, eating out and holidays. By looking through these you’ll see where you could possibly make savings. For example, do you have subscriptions that you’ve forgotten about or barely use? Or do you have regular treats that are surprisingly expensive over the month, like a daily coffee habit? Could you cut back on clothes shopping or find cheaper deals and discount codes online?

Deal with your debt

When you’ve done that, take a look at any debt you have on things like credit and store cards or personal loans (also called unsecured debt). As the interest on any debt is generally much higher than you’ll get on your savings, you should try and pay down any debt first. If you’re in a large amount of debt there are ways to make it more manageable – like bringing it into a smaller monthly payment over a longer time.  You can get advice about debt from the Citizens Advice Bureau.

Sweep your bank account

Once you have a budget for your essential and discretionary spending plus any debt payments, there’s an easy way to stick to it. You can ask your bank to automatically move any money above that amount to a separate savings account when you get paid. Having to dip into your savings can help you stay disciplined and avoid any impulse buys.

Use the 50/30/20 rule

Another way to create a budget is to follow the 50/30/20 rule. Doing this you divide your income into three parts. 50% goes on essential spending like bills. 20% is put aside in your savings, investments and pension for the future. The remaining 30% you can spend on yourself with things like gym memberships, entertainment and holidays. 

Be ready for emergencies

You should have roughly three months’ living expenses put aside as an emergency fund. Then you’ll have something to fall back on if you lose your job or face large, unexpected bills. Another thing to consider is income protection insurance. This will cover some of your lost earnings if you have a long term illness or an accident that stops you working.

3. Put together a savings or investment plan

Based on your financial goals, create a savings plan to reach them over weeks, months or years.

Short-term savings

You’ll need to find a savings account with easy access to your money – so you can get it quickly if you need it.

It’s important to shop around for the highest interest rate you can find, as savings rates are currently below inflation. That means your cash savings will have less spending power, year on year. Consider using a cash ISA, you’ll keep more of your interest as you won’t pay tax on it.

Longer-term goals

For your bigger goals you can look at an investment plan. This can mean putting money into things like stocks, bonds or exchange-traded funds. They can outperform cash savings over a longer time (a minimum of five years is recommended). But they also come with varying amounts of risk. The more adventurous your investments, the bigger possibility of making large profits – or losing what you’ve put in. The value of investments may go down as well as up and you may not get back the amount you invest. You can check how risky you’d like your investments to be by taking a quick quiz using our risk tool.

One way you can save for the long term is in an investment account. Or with something more tax-efficient like a stocks and shares ISA. It also covers money you’d like to pay into your pension.

Not sure if your finances are in good enough shape that you can invest for the long term? Just answer the questions here.

4. Keep things updated

Once you have a financial plan in place, you’ll need to review it regularly to make sure you’re hitting your targets – or when things in your life change.

If you’d like some help putting it together you can also get independent financial and investment advice from a professional by using a service like Unbiased.co.uk.

For investments worth £75,000 or more Aviva Financial Advice can help you explore your options. Just contact the team to get personalised investment advice from Aviva Financial Advice. Any recommendations the advisers make will be on products from Aviva and other carefully selected investment partners.

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