Discover the importance of financial planning and learn how it can help you achieve your financial goals.

What is Financial Planning?

Financial Planning is the process of building clarity of what’s important to you, setting goals around those values, assessing your resources, and creating a strategy that aligns with your values and achieves your objectives. It is about bringing structure, efficiency, appropriateness and congruency between your actions and your desired outcomes.

Financial planning covers various aspects of personal finance, including budgeting, saving, investing, insurance, retirement planning, tax planning, estate planning and intergenerational wealth considerations.

Here's a breakdown of key components in financial planning:

1. Setting Financial Goals:

• Identifying short-term and long-term financial objectives.
• Examples include buying a home, funding education, saving for retirement, or starting a business.

2. Assessing Current Financial Situation:

• Reviewing income, expenses, assets, and liabilities.
• Understanding spending habits and financial behaviours.

3. Creating a Budget:

• Developing a realistic budget that allocates income to expenses, savings, and investments. This can involve varying levels of detail, depending on what works best for you.
• Monitoring and adjusting the budget as needed. Are you spending more or less than you thought you’d need?
• Budgeting is not necessarily about being strict about your spending; rather it’s about understanding where your money is going, what’s left over and what is really costs to fund your lifestyle. This builds a strong foundation for building strategy and understanding your longer-term financial capabilities, giving you the opportunity to make smaller changes now rather than material sacrifices later in life.

4. Saving and Investing:

• Establishing an emergency fund for unexpected expenses. Covering these risks means you can be more assertive with your broader strategy, such as taking on debt and/or investing.
• Investing based on risk tolerance, time horizon and financial goals.

5. Insurance and Risk Planning:

• Evaluating the need for life insurance, disability insurance, income protection and trauma cover.
• Ensuring adequate coverage to protect the family against unforeseen events, considering your available budget.
• Understanding that ‘Risk’ comes in many forms. In the short term, it could be employment risk and market volatility. Over the long term, it could be the impact inflation has on the real value of your wealth, or the risk of running out of money in retirement (both of which can be managed through early and careful planning).

6. Retirement Planning:

• Calculating how much is needed for retirement and putting a plan in place as soon as possible. It’s an objective that hopefully spans decades, filled with travel, investing in our health, seeing our families grow through 2nd, 3rd and sometimes 4th generations, recreation and doing new things. It takes a lot of work and time to build for this.
• Contributing to retirement accounts such as superannuation, annuities or other tax deferral strategies.

7. Tax Planning:

• Build your activity and strategies around tax optimisation. The less tax you pay, the more financial capital available to achieve your objectives.
• Considering tax at all levels of your financial position: salary, business profits, choice of investments, portfolio rebalancing, structuring and ownership, planned future sale, role of debt, etc.

8. Estate Planning:

• Creating a plan for the distribution of assets after death.
• Establishing wills, trusts, and powers of attorney.
• Consideration for the role superannuation, Life insurance and investment bonds may play in your achieving the best outcomes for your loved ones, noting these may not automatically make up part of your Estate.

Benefits of Financial Planning:

1. Goal Achievement: Financial planning helps individuals and families articulate their financial goals and develop a roadmap to achieve them. Clarity and direction allow positive action and implementation, not just intention.
   
   
2. Financial Security: It provides a sense of security by creating a safety net for emergencies, ensuring proper insurance coverage and planning for retirement.
   
   
3. Wealth Accumulation: Through systematic saving and investing, financial planning contributes to wealth accumulation over time.
   
   
4. Risk Management: It helps in identifying and managing financial risks through appropriate insurance coverage, diversified investments and investment strategies that are specifically aligned with different objectives and timeframes.
   
   
5. Tax Efficiency: Strategic tax planning can minimize tax liabilities and maximize after-tax returns on investments.
   
   
6. Confidence and Peace of Mind: Having a well-thought-out financial plan gives individuals confidence and peace of mind, knowing that they are on track to meet their financial goals. It promotes Financial Wellbeing, which is a huge contributor to our quality of life.

Challenges or Reasons Financial Planning Might Not Be Beneficial:

1. Lack of Commitment: Financial planning requires commitment and discipline. If individuals do not stick to the plan, it may not yield the desired results.
   
   
2. Incomplete Information: If the financial plan is based on incomplete or inaccurate information, it may lead to flawed decisions, ineffective strategies, lost opportunities or unintended future consequences.
   
   
3. Unrealistic Expectations: Setting unrealistic financial goals or expecting quick results can lead to frustration and dissatisfaction with the financial planning process. The risk is that you stop doing the right things and deviate from your plan, often leading to further setbacks and objectives not achieved. Discipline is crucial.
   
   
4. External Factors: Economic downturns, market fluctuations, or unexpected life events can impact the effectiveness of a financial plan, requiring adjustments along the way. If you do not constantly revise your strategy, there is a chance you’re no longer going in the right direction. Further, if you prefer to structure your decisions around predicting or reacting to external factors (fluctuating share markets, for example), you will find this is not congruent with a well thought out and structured strategy where you focus on what you can control.
   
   
5. Poor Implementation: Even with a solid plan, poor implementation can hinder success. Failure to execute the planned actions or adjustments can undermine the benefits of financial planning. Busy people often struggle with this component if trying to do it themselves, either due to time constraints or not knowing the best way to put things in place.

In summary, while financial planning offers numerous benefits, its effectiveness depends on factors such as commitment, acknowledging that your financial journey is unique, accurate information, realistic goal setting, adaptability to external factors and proper implementation.

Engaging a Financial Adviser with your planning needs is not about applying restrictions and rigidity to your life and how you interact with money. It is about providing guidance, leveraging from our experience and building some deliberate structure to provide you with more freedom to live your life.

It is for these reasons that partnering with a high quality and Independent financial adviser will give you the greatest chance of success, bringing peace of mind and financial wellbeing.