The first step in good financial planning is to establish where you are now, where you want to be and what you need to do to get there taking into consideration what is important to you and your current financial means.
Everyone is different. As we go through the various stages of our lives, different things become more important. There are however common threads which arguably, apply to almost everyone.
The simple basics of wealth planning are to accumulate when you can and protect what you have built. Accumulation means saving and protect means insuring. the two go hand in hand and are an essential part of financial planning.
1: Protect your dependants: Try to imagine the lives of those who depend on you financially if you were no longer around. What financial problems would they have? Would they suffer? If they would, then it would be wise to provide them with a financial cushion on your death through a life insurance policy. The amount of cover and the price of it would depend on your age and the size of the financial hole you would like to plug. Getting it wrong could be expensive and many do. My advice? Seek advice.
2: Eliminate your debt: By debt, I mean short term, non-mortgage debt, such as loans and credit cards. Trying to build a financial plan whilst in debt is a little like trying to build a castle on the sand. Any interest or growth you make on what you have saved will be cancelled out by the interest you are paying on what you have borrowed. Debt eliminated, you are ready to start.
3: Insure your valuables: Most people understand the value of insurance when it comes to their home, their car and the items in their home. What is more important? Your car or your health? Which should you insure first, the valuables in your home or your ability to work? Insurance policies such as income protection and critical illness cover can be surprisingly affordable especially if taken out at a younger age and essential if you should ever be unfortunate enough to make a claim.
4: Have a long-term plan: Your long-term plan, such as retirement planning, needs to be set and running as early as possible. Circumstances allowing, it should be reviewed regularly, but remain intact for the duration. Here in the UK, we have amazing tax incentives to encourage you to save for your retirement, the longest holiday in your lifetime. This should take a considered and regularly reviewed strategic approach for best results.
5: Save! Most people with large sums of money saved started by putting away something quite modest on a regular monthly basis. The best way to do this is to analyse your income and your expenditure. If you have anything left at the end of the month, squirrel it away. The next step is determining where you put that money. With interest rates for savers being at an all-time low, other savings methods should be considered, especially if you are planning to save for 5 years or more. Seek advice.
6: Show the taxman no mercy: HMRC is ruthless and efficient in obtaining taxes from you, but has been kind enough to offer you ways to shelter your wealth from tax. Many of us are too uninformed to take advantage of these tax shelters, even where HMRC has been generous. This where a good financial adviser would be worth their weight in gold. Protecting your wealth against disaster and protecting your wealth against unnecessary tax are of equal importance. Be ruthless in your approach.