Whether you want to start taking better care of your finances or look at ways to enhance your wealth, a personal financial plan could be your key to a more prosperous future.
Having clarity of your financial situation can give you more control of your life, and help you boost not only your income but your happiness too. Sounds good, right?
A personal financial plan should cover all your finances: income, expenses, debt, savings, insurance, tax, pensions, and investments. When you first put one together you’ll need to set your financial goals. How do you want to be living in five, 10 or even 20 years? Do you want to be debt free and living in your own home? Perhaps you want to get married? Or are you dreaming of a comfortable retirement abroad? Whatever your goals, your plan should include strategies to achieve them and be flexible as your circumstances change over time.
If you’ve just started thinking about getting your finances on track, here are three actions to consider:
1. Set a budget
Having a monthly budget will show you a clear picture of your finances, including the areas in which you might be overspending and where you could potentially save. It should include all your income and expenses: salary, shopping bills, rent or mortgage, utilities, subscriptions, etc. It might be a bit time consuming, but once done, it’ll be simple to update. In fact, getting it down on paper can feel therapeutic and help reduce stress. If you’re a spreadsheet fan, you’ll be in your element. You can give our budgeting planner a go. And there are also many budgeting and money managing apps available to download from the various app stores.
2. Deal with debt
Getting rid of debt is a priority. Pay off high interest rate loans as soon as possible. If you can, pay credit cards off each month in full. If this isn’t manageable, apply for a card with 0% interest rate and transfer the balance to avoid mounting charges.
3. Save for a rainy day (or a few rainy months)
2020 was tough on many levels, but it’s really highlighted how unforeseen events can affect our lives. Saving up enough to get by for say three to six months may help ease financial anxiety in times when you might struggle with income. You may even want to think about an income protection insurance policy to cover you if illness or injury prevents you from working.
Ready to invest?
If you’ve got some savings and want to see your wealth grow, where do you start?
Well, the first thing to recognise is that no investment is without risk. Market prices go up and down, and there’s no guarantee of a good return. You might even get back less than you put in.
Think long term
Experts agree that you should aim to invest for at least five years. There are no absolute promises, but overall, the longer time you leave your money in, the more potential it has to grow in value. Generally, investments with greater levels of risk have the potential to produce a higher rate of return but also the potential for higher losses, while those with lower risk have the potential for more modest returns and losses. If you feel able to deal with a few tricky patches along the way, you could reap the rewards in the longer term.
‘So, what could I invest in?’ Again, this depends on your comfort with risk. There are many things to invest in all with different risk levels and they are called ‘asset classes’. The main ones are cash / money markets, bonds, property and shares (or stock). When you invest in a group of these you’ll have ‘a portfolio’.
Spreading the risk
You may think the world of investments is a bit scary and that you might lose all your money if the markets suddenly crash. You’ve heard the saying — the one about not having all your eggs in one basket and it makes perfect sense. Investing in a range of different assets will help to spread the risk, so if one of your investments falls flat, but others do well, any losses may balance out eventually. This is called ‘diversifying’.
Seasoned investors know that you can’t predict how a market is going to behave. The best time to buy is when the market is low, and to sell when prices are high, but to time things perfectly, you’d need to continually check the performance of your assets. For most people this isn’t practical. One risk reduction investment strategy is called pound‐cost averaging. It involves investing smaller amounts regularly (say every month). When market prices are low your money buys you more shares, but fewer when prices are high. The idea is that you just leave the investment alone to play out over time. If some investments do poorly initially, it’s likely they’ll recover later. This drip‐feed approach, rather than a lump sum investment, means that if there’s a substantial fall in the market you won’t lose too much. Of course, the downside is that if the market is buoyant you miss out on gains by not going all in at the beginning.
In the past decade or so there’s been growth in socially responsible investments, with more people wanting their money to go into something they believe in, as well as make a profit. ESG investments (ESG stands for environment, social and governance) are one of these types of investments. Say you wanted to buy shares in a company, you’d look at how it performs against certain ESG criteria. For example, how it conducts its business, its policies on energy and waste, and how it treats employees.
Choosing the right investment requires some homework. Annual reports and company prospectuses are a good starting point to understanding a company’s values and how it’s run, as well as its profit margins.
Whatever your approach to investing, you may find getting professional advice beneficial before you begin.