Financial planning simply explained
The key to financial planning is not just making sure you have enough money to live the lifestyle you want, but that you don't come to the end of your life with too much left either.
Watch the video above to learn what financial planning is and how it can help you to better plan the life you want to lead.
Imagine that everyone is carrying around a 'financial bucket'.
You probably already have some money in your bucket – this is the money in your current account, your savings, perhaps some shares or investments. This is the money that you can get your hands on at short notice – if you need to. The key to financial planning is not just making sure you have enough money in your financial bucket to live the lifestyle you want, but that you don’t come to the end of your life with too much left in your bucket either. Because if you do, that means you may have been able to stop working 5 years earlier, or you could have taken that holiday of a lifetime, or helped the children more, but at the time you didn’t know you could afford to.
Your bucket already has money flowing into it, such as your monthly salary, child benefits or even income from a property you are renting out. And at some point in the future other money may flow into it too – such as a pension, or a lump sum from downsizing your home. Outside of your bucket you will also have assets that you can’t include at the moment – such as your house. You need to live somewhere and your house might cost you rather than earn you money for a long time to come. You may also own your own business, but this is where your income comes from. Unless you sell it for a lump sum of money your business can’t be included in your financial bucket either. And then you may have a pension fund, which will sit outside your bucket until a point in the future that you decide to use it. You may choose to take 25% of it as cash that you don’t have to pay tax on, or use it to draw a future income, flowing money back into your bucket again.
You probably already have some money in your bucket – this is the money in your current account, your savings, perhaps some shares or investments. This is the money that you can get your hands on at short notice – if you need to. The key to financial planning is not just making sure you have enough money in your financial bucket to live the lifestyle you want, but that you don’t come to the end of your life with too much left in your bucket either. Because if you do, that means you may have been able to stop working 5 years earlier, or you could have taken that holiday of a lifetime, or helped the children more, but at the time you didn’t know you could afford to.
Your bucket already has money flowing into it, such as your monthly salary, child benefits or even income from a property you are renting out. And at some point in the future other money may flow into it too – such as a pension, or a lump sum from downsizing your home. Outside of your bucket you will also have assets that you can’t include at the moment – such as your house. You need to live somewhere and your house might cost you rather than earn you money for a long time to come. You may also own your own business, but this is where your income comes from. Unless you sell it for a lump sum of money your business can’t be included in your financial bucket either. And then you may have a pension fund, which will sit outside your bucket until a point in the future that you decide to use it. You may choose to take 25% of it as cash that you don’t have to pay tax on, or use it to draw a future income, flowing money back into your bucket again.
So with all this money coming in, your bucket should just fill-up, right?
Well, there’s just one problem: your bucket has a tap on the side. While you are working hard to fill your financial bucket, this tap is draining it like there’s no tomorrow. This tap is the cost of living… the cost of running your car, the cost of paying for your home, going on holiday, paying for the kid’s education. This tap will keep draining your financial bucket until, at some point in your life, it will be turned off and replaced by a second one. You turn on this new tap when you retire, or decide to give up work early. However, this tap could drain money faster than the first, because now you have the time to do all the things you’ve always wanted to do – whilst you are still fit enough to do them.
This tap too will only keep running for a certain amount of time though, because at some point in your life you will need to slow down and this tap will be turned off for a final one to replace it. You turn on this final tap at the time in your life when you are more interested in being comfortable and being able to look back on a life well lived. This tap too will be eventually turned off, but when that time comes you want to be sure you can look back at your life knowing that you got the balance of your financial bucket right.
This is where financial planning is so important because without it, only one of two things will happen to your financial bucket. Either it will run dry, meaning that after spending 30 or 40 years working hard you won’t have the money to do all the things you had planned. Your taps will have to be turned right-down just at the time you should be enjoying yourself. Or worse – you could end up with your financial bucket overflowing! After spending all your life paying tax on everything you have earned and bought, if you go to your grave with two much left in your bucket then a large part of that, too, will go to the tax man and not your loved ones.
But paying tax is not the worst part. If you come to the end of your life with too much money, that means you could have done more at the times when you could have enjoyed it the most. You could have bought that holiday home. You could have taken time off to travel. You could have helped the children more or even stopped working years earlier, but at the time you were worried about being able to afford to.
Getting the balance right is what financial planning is all about. Our job is to help you manage and plan your financial bucket, and it’s never too early to start. We aim to ensure that you have the financial security to enjoy all those rich life experiences whilst at the same time being ready for whatever the future holds. Because once your goals for the future are clear, it then all comes down to planning – and simple mathematics.
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