Failing to plan usually is planning to fail. Evidence shows that people who make financial plans and stick to them are better off than those who don’t. But how do we go about making our own personal financial plan and where do we start?
As with all progress in life, it starts with developing good habits.
“Building strong financial habits and sticking to them creates real peace of mind. Many people avoid looking at their finances and end up burying their heads in the sand. But those who face their financial reality head on are always better off in the long run, because they’ve taken the time to prepare,” says Amy Doyle, financial planner at Davy.
Those who know say it takes 21 days to form a habit and 90 days for it to stick. “The same applies to saving. When you set aside a little money every month, it becomes second nature,” she says.
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Once your saving routine is well established, you can start thinking about what to do with the money you’ve built up.
“A natural next step is investing. Investing isn’t just about taking on risk, it’s about putting your money to work so it can grow and compound over time,” she says.
“This helps protect you from the effects of inflation, which gradually erodes the value of cash that’s simply left sitting in an account.”
If you’re of a mind to draw up a financial plan, “the most powerful way” is to start by asking yourself some really important questions around what exactly you want to achieve, she advises. Is it financial freedom, early retirement, to become debt free, or to prepare for a major future expense?
Aligning your goals with your plan helps ensure success.
“It’s important to keep that plan realistic and to stay consistent and follow it over time,” she adds.
Next, look at your expenses to see where you can reduce or adjust them in a way that will allow you to budget more effectively for your future.
“Write down all your assets and liabilities, creating your own balance sheet, because only when you clearly see what you own and what you owe can you understand your true starting point,” says Doyle.
From there, note your incoming and outgoing payments to get a clear picture of your monthly cash flow.
“Once you know how much you have left over, you can make a purposeful plan for it. Perhaps increasing pension contributions to build a stronger retirement fund or using the extra money to reduce debt more quickly. Comparing the interest rates on your debts with the interest or potential returns available on savings or investments will help you decide what makes the most financial sense for your situation,” she points out.
Once drawn up, reviewing and updating your plan as your needs change is key to long-term success.
But the earlier you do all this, the better. “Retirement, in particular, is a goal that should be planned for early in your career rather than left until the last minute. Building a pension fund over time allows your money to compound, helping to support your needs and replace income when you eventually step away from work,” she says.
Owning a home in Ireland usually means having a mortgage attached to it and, similarly, paying that mortgage down is a major milestone many people work hard to achieve.
“Becoming debt free is an important goal, especially as people approach retirement and look to reduce their monthly outgoings. Making extra repayments on your mortgage, where possible, can help you reach this goal sooner and give you greater financial flexibility later in life,” she points out.
If you have children, planning for expenses such as education not only helps secure their future but also gives you peace of mind.
“At a later stage in life, you may have built up wealth or assets that you hope to pass on to your children in the most tax-efficient way possible. Having a clear plan in place helps you do this thoughtfully and proactively, rather than leaving it to chance,” she adds.
Having a financial adviser is in itself one of the best ways to stay committed to your plan, especially when life doesn’t unfold as expected.
“Life rarely moves in a straight line and an adviser is there to guide you through the more challenging moments. It’s easy to react emotionally when markets underperform or a worrying headline grabs your attention but a good adviser helps you stay calm, make informed decisions and remain on track,” she says.
