What's a life plan?
5 April 2008
Life is a journey. And the first thing you must do to prepare for the journey ahead is take stock.
Then make a plan - a life plan, which you must continually review, identifying your position as you plot your course.
Think of yourself as a mountaineer, where uncharted territory lies all before you.
There are maps to guide you and you are not alone, as others have charted a similar course over the years from childhood to old age. While no two journeys are identical, there are similarities and you can learn from the experience of others. Let’s take a look at a typical life plan.
As children, hopefully most of us don’t have too many money worries. A little extra pocket money at the end of the week suffices to satisfy our needs, if not our wants.
But then, as you leave school for further education, life’s realities begin to hit home. A student loan may be helpful but it’s still a debt and, despite favourable interest rates, has to be repaid one day.
Our debts tend to rise in line with our expectations and so increase when we start full time work. A promotion may bring a welcome increase in salary, but tends to go hand in hand with additional responsibilities. Perhaps you need a new suit, or a new job takes you further away from home and your travel costs increase.
After much hard work, you may have scraped together enough to put down a deposit on your first home. Great news! Finally, a ‘real asset’ that could last a lifetime. Except that now you’ve got a lifetime’s worth of mortgage repayments to think about.
If you plan on raising a family, there’s a world of new things to think about – from cots to clothes to childcare. And later on you will need to set aside money for holidays, school trips and much more.
Even when you’re heading for retirement, there’s plenty to ponder. Will you be debt free? Have you got a tidy little nest egg to fall back on? What’s on your mind? Holidays or heating bills?
In short, you need a life plan.
Towards a plan
Where do you see yourself in a year’s time? Pretty clear? Good. Then, what about ten years or thirty years from now? A bit more uncertain, perhaps. Where do you want to be and how would you like to be living? If no clear images come to mind, don't start panicking – start planning.
It’s generally reckoned you need to decide today what you want to happen in three years time and you’ve probably got about three years to plan your ten year outcomes. In other words, when it comes to planning your finances, you need to start well in advance. Let’s say you’re currently renting a flat. All that money going out, with not a lot to show for it other than a roof over your head. One day you plan to buy a place of your own. But with the price of property heading skywards, getting the money together to put down a deposit is an increasing challenge. You will need to have saved several thousands of pounds.
Now you know why they say ‘proper planning prevents poor performance’. Although you might just want to get started right away, the time you spend planning is time well spent and will pay dividends. Same goes for your financial future.
So let’s get on with it.
There’s a simple, well-known tool to keep you on track. No surprises, it’s called the planning cycle.
The planning cycle
Status - where are you now?
Objectives - where are you going?
Strategy - how are you going to get there?
Evaluation - did you get there?
Status – taking stock
First you have to carefully analyse your current position. How do your finances stack up? Where does the money come from and where on earth does it all go? Can you balance the books every month, with a little left over for saving? Or are you running up debts at a rate of knots?
Start by reviewing your finances. Remember, it’s called the planning cycle for a very good reason, because you have to go through this process again and again. You should review your finances at least once a year, more often if you are going through significant life changes like starting a family or buying a home.
There’s a separate feature on this called Balance your Budget, which you might like to check out when you’ve gone through the planning process. It takes you step by step through the business of reviewing your finances.
Objectives – you’ve got to have a dream
Set your goals. It’s not easy to plan far into the future when you’re living day-to-day. But you have to try.
Envisage what you want out of life. See it clearly. Name it, proclaim it, then make detailed plans to bring it to fruition. There's no invention that was not first a vision, an image in the mind.
Dig deep for this one. What do you really want out of life? Are you looking to start a family? Pay off debts? Enjoy a good lifestyle in retirement?
There’s a simple acronym you can use to evaluate your objectives – SMART; simple, measurable, attainable, realistic, time-able. You will need to regularly review your objectives to ensure they have not changed and you will need to be realistic. Can you honestly cut back on spending? Have you checked out tax-free savings? Have your life goals changed? Remember to keep reviewing your finances too.
Strategy – attaining your goals
How you reach your goals (in this case, your savings and investment strategy) will be conditioned by a number of factors; your personal circumstances, how long you can stay invested for, your attitude to taking risk and the state of the markets.
A financial adviser can take you through the whole savings and investment planning process by conducting a personal financial review, helping you determine your aims and ambitions, and laying out a strategy to achieve them that should take into account all the relevant factors.
There are many websites that will also help you to get an idea of your choices. Bear in mind that not all financial websites are impartial. And using the life planner will help you get the most out of any advice or information you get.
Remember, You and your money provides general information and not advice. If you are seeking advice on financial matters you should contact a qualified financial adviser. If you do not have a financial adviser and would like to contact one visit www.nsandi.com
Evaluation – keeping tabs on progress
Sadly, the most important part of the planning cycle - evaluation - is frequently the most easily overlooked.
It is essential to regularly monitor how well your plans are developing. Again there are websites and financial advisers that can help and if you are able to afford it, a financial adviser will provide you with frequent reviews on performance – at least once a year - across all your savings and investments, which can then be checked against your goals.
Or you can do this yourself if you take advantage of the planning tools available on the web. Microsoft and Yahoo are just two examples of online planning tool providers.
Succeed by sticking to the plan
One of the key elements in planning is to ‘start with the end in view’. Something of a challenge, perhaps, when you are in your 20s and not looking for your savings and investment plans to pay out for another 40 years or so.
The key thing is to make your plan and, within reason and with regular reviews, stick to it. Investments take time to mature, and the longer your time horizon the more flexibility you have and, with the right help, the more likely you are to succeed. So unless your circumstances change dramatically, stick to your plan and see it through to the end.
Seek help. Even if you feel totally confident about your future and are happy with the way your savings and investments are going, you would probably be well advised to seek expert financial advice from an IFA to be sure you are making the most of your money.
