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John Lowe of MoneyDoctors.ie explains financial planning in a nutshell - essential for every walk of life.
If you had to plan a journey from Dublin to Killarney and you didn't have sat nav (satellite navigation, to give it the full name) you’d be taking out a map and planning the route, deciding on where to have lunch tor take a break ensuring you knew where to top up with petrol or electricity.
If you encountered diversions, you would get out the map and decide on a new route. Throughout the journey, you would check on your progress and keep an eye on your car and you and your passengers’s wellbeing.
Your financial plan should have the same qualities. That is to say, it should help you reach your destination, make your journey as fast as possible and stop you from wasting time, energy and, of course, money.
Bear in mind the following principles when deciding what your financial priorities should be:
1. For most people, their greatest asset is their income. Unless you are fortunate enough to receive a windfall, it is almost certainly your income that you will use to achieve your financial objectives. Under the circumstances, you don’t want to risk it and you don’t want to waste it. There are all sorts of inexpensive insurance policies designed to protect your income. Incidentally, anyone under retirement age is 20 times more likely to be unable to work for a prolonged period because of sickness than they are to die, which is why I keep droning on about income protection often being more important than life cover, especially if you have children.
2. Personal debt, by which I mean everything from store cards to mortgages, will be the biggest drain on your income. If you’ve borrowed money (and obviously there are many circumstances under which this makes excellent sense), then you should make it a priority to repay your loans as quickly as possible. Always check the interest rates periodically and shop around.
3. It’s vital to have a safety net or emergency fund (RDF - rainy day fund - 3 to 6 months joint net annual income for those emergencies, sudden loss of income or investment opportunities) to deal with those little trials, tribulations and extra expenses that life often throws our way. Also, you want to make as big a return as possible from your investments.
4. If you’ve got a good, secure income, it doesn’t actually matter what other assets you possess. Emotionally, it’s nice to have the security of owning your own home. Financially, it certainly makes sense. But, actually, an investment that is just as good and maybe better is a really decent pension plan.
With a good pension plan you can leave work early and, if you live to 100 or more, never have to worry about money again. I personally would not depend on the State pension - I believe it may not be there in 20 years time irrespective of auto-enrolment being brought into the workplace next September.
To maximise your tax relief on your pension contributions, these are the thresholds - if for example you are between 30 and 40 years of age, you can invest up to 20% of your net relevant earnings to avail of the juicy tax reliefs...especially if you are on the 40% tax rate…
Age / Limits
5. Know thyself. There’s no point in setting financial objectives that you’re going to find impossible to attain. Your financial objectives may involve modest changes to your behaviour, but they shouldn’t require a complete change in your personality.
The most important word when it comes to financial planning? Start!
Have a very happy new year.
For more information click on John Lowe's profile above or on his website.
