What Is Financial Planning?What is financial planning to you? It is a funny thing. When you speak to people, and I introduce myself as a financial adviser or planner, they have an instant tendency to want to run! Fearful of pushy salesmen, most people have a natural dislike of the members of my profession. In truth, I can't say I blame them. When you do my job, you often find yourself at seminars or training courses with other advisers. Sometimes there might be dozens or even hundreds of us. Let me be honest here, some of my closest friends work in finance. But, I have come across some absolute nightmare, amoral slick salesmen too. I guess that is just life. If you work out the statistics, for every nice guy, there is probably an amoral salesman too (is it more than a one to one ratio though?). The public at large either do not hear about or fail to remember the nice competent people. Everyone remembers the slick sales guy though. This does us all a disservice. For all those people that hear my occupation and start making excuses or sprinting usually say the same thing. 'I don't need any help'. The ironic thing is that I have never yet met anyone that didn't need any help. They just don't realise it. I’m not trying to be cute here, but every time your situation changes, be it a marriage or divorce, birth or job move, your needs also change. Most people don't realise that or won't accept it. So, for the record: 'Financial planning is the process of making advance provision for financial needs that will arrive in the future.' There, I stole that from a text book. It must be right. As a general rule, financial planning is all about identifying shortfalls. For example, if you want to retire on x amount per year at age 60, it is possible to calculate roughly what will be needed as a lump sum to generate the money. From there, you can make an estimate of how much needs to be saved each month between now and then. The results can then be modified around any current or previous provision being made. The difference between what is being saved and what needs to be saved is the shortfall. The other rather funny thing about the general public is that EVERYONE has money concerns. They unite us all. Money is universal and so we are all, even if only to a minor degree, interested in financial issues. How can I get out of debt? Where will my mortgage be cheapest? Where will show decent investment returns? So, at the same time as shunning all advice and needing no help, most people also want to simultaneously pick our brains for some free advice. I can only assume that it is human nature. At the core, financial planning is an attempt to provide funds when they might be required for two potential types of event. They are known and unknown possible scenarios. For example, I am injured at work and need to retire through ill health at age 40. Nobody knew that you would be injured or need to retire so young. It was, after all, an accident and you could not have known about it in advance. There must also be known scenarios too. An example of this would be the preparation for an expected event, like the marriage of a child for which you are to pay for the wedding. You knew she was growing up, you knew she had a boyfriend and you knew that she planned 'one day ' to marry. You could save in preparation for the event. Financial planning looks at some key questions. For example: If I die young, how will my children be raised? How much money will they have compared to what they need? How will my husband / wife survive without my income? If I am sick and unable to work, how will I survive? How will my family survive? I want to buy a house, how do I raise the finance? I want to retire in comfort on a decent income. What needs to be done? As you will notice, these are all personal questions with answers that will be very different from person to person or from household to household. It is one of the things that ensures finance is so interesting - you rarely come across exactly the same problem or situation twice. Of course, this is why most financial advisers refuse to answer your questions at parties. It is because you ask one or both of just two questions. You want to either save money or make money from your savings. Important issues, I admit, but only a tiny part of the role. It might also explain why the majority of finance people have no answer to the question, 'What shares should I buy?' Buying shares, for most people, should be placed at about priority number 25 on the list. With 24 other things to do before that, when would you need to analyse shares? Hopefully, as you become more and more conversant with financial issues, you will be able to answer your own questions and make the best use of your advisers. Or, better yet, when you meet me at a party, you can tell me that you work closely with an adviser and he is a great guy / girl with expert knowledge and he has changed your life for the better. Ok, I can dream…
About Stuart Langridge
|