This is the second of three Insights in which we reveal the biggest secret in personal finance – how to design a great financial plan.

What have we covered, and what’s coming up?

In the first Insight, we learned that very few people are aware that financial planning services exist.

We also explored why this (the most valuable) financial service seems to be so secret and touched on the personal financial crises that can arise when we fail to plan.

If you’ve not read that Insight – please start there.

In this Insight, we’ll explain what financial planning means – in plain English – and why it’s so important to follow this approach.

And we’ll start to outline a seven-step (A.W.E.S.O.M.E.) approach you can use for planning your money – which we’ll complete in the next and final Insight.

You can use this process regardless of your age, income, wealth or wherever you live in the world – and whether you choose to plan your money on your own or, as we’d suggest, with help from a professional adviser.

We’ve called this an ‘awesome’ process to make it easy to remember, and hope you’ll share this series with your friends and family.

Why do your money skills matter?

We’ve known since the 1970s (from Psychologist Albert Bandura’s ideas on Self-Efficacy) that we humans tend to engage more in activities where we feel we have some ability.

We don’t tend to accept invitations to play competitive tennis if we’ve never held a tennis racquet!

So, it goes with personal finance: we all have financial goals, but achieving those goals efficiently (without wasting a ton of money) can be hugely challenging without a sound plan, and if we don’t know how – we’re unlikely to plan.

We’re more likely to avoid talking about money matters altogether – although there are many reasons we do that, as we explored here!

Bandura and other Psychologists found that when we don’t feel skilled enough, we focus more on our failings, lose confidence, and avoid those complex tasks.

On the other hand, as we become more capable, we:
• Develop more interest in those activities and commit more strongly to them.
• Recover quickly from setbacks, and re-frame our problems as tasks to be mastered.

To learn more about the drivers of behaviour change, look at this brilliant model from Social Scientist and author of ‘Tiny Habits’ Dr B.J. Fogg.

It shows how our capability is critical for our success because it reduces the need for that elusive power called ‘motivation’!

When do you need to learn about money?

Ideally, you’ll learn the basics about financial planning – and take action on your priority needs – long before the arrival of a catastrophic financial event like those we listed in this first Insight.

However, we must accept that our knowledge may be limited. The truth is that very few people know much about financial planning.

Just remember, it’s never too late to learn about money – from trustworthy professionals, in person or in posts like this.

We all make mistakes with money, but no one wants a financial life journey where all the lessons come from heavy losses in unsuitable investments.

Or from a failure to set up some low-cost but essential insurance for our life and health.

Of course, you don’t need as much knowledge about personal finance if you have a good adviser. You could simply let them (or an advice Robot!) plan your money for you – but that’s not an enjoyable or the most effective way to plan your money.

So, we’d still encourage you to learn the basics.

That way you’ll stand a better chance of knowing if you’ve hired the right adviser – and you’ll feel more engaged in (and in control of) the process to design your financial life plan.

Three reasons to learn the basics of financial planning

The first reason to learn about financial planning is that good advisers can’t work in isolation to create a plan for you.

They’ll always work with you to ensure your plan reflects what you need and want – for yourself or your loved ones.

And, as you are the owner of your financial life, it helps if you understand, in broad terms, how your plan is designed and how you’ll review it on an ongoing basis.

This understanding of the process will give you more trust in the value of your plan. Which should result in you being more likely to do what you need – to make it a success.

Second, if you already have an adviser, learning this process will help you consider if the advice you’re receiving is worth what you’re paying for it.

Third, given that schools and colleges don’t teach us anything about long-term financial planning, you’ll want to learn a sound process to share with your family and friends.

On financial planning for couples – and families.

If you have a partner, you must decide if you’d like to plan your money together from the start.

You could design your own plans separately initially – so you’re free to think about what matters to you personally – and then come together to build a joint plan from there.

Alternatively, you may wish to keep your longer-term money plans separate.

To be clear, there is no golden rule answer to this question.

That said, we have three suggestions about money for couples in committed relationships.

The first is that you discuss and agree on how you’ll share your regular (month-to-month and year-to-year) spending, including your holiday costs, in a way that feels fair to you both.

So, this might mean taking into account your different take-home incomes and your different contributions to running your home!

The second is that you discuss and advise each other on how you will approach your financial planning – even if you’ve decided to make separate plans and won’t share the details.

The third suggestion is that you encourage each other to learn about this ‘awesome’ financial planning process.

After all, as we’ve seen, we’re more inclined to engage in activities we know something about. And a shared understanding of financial life planning can bring us closer (or keep us close) to our partner, too.

Finally, you may want to consider the best ways to pass your wealth to your partner (and any children and grandchildren you wish to benefit), both during your lifetime and after your death.

Sound financial (estate) planning can deliver huge, huge benefits in financial and emotional terms.

Just be sure to talk with a professional who’s qualified to advise you in this or other later-life financial planning areas – that concern you.

Not all advisers are.

What does financial planning give you, and your loved ones?

There are many ways you can benefit from sound financial planning – as we’ll see in a moment.

But, in a nutshell, a good financial plan* puts the right amount of money into the right hands at the right times.

* Assuming you take action on your plan and maintain it over time!

Just remember – this typically means putting the right money:

1. Into the hands of others immediately if you suffer a disastrous event like an unexpected long-term illness or death, leaving your loved ones without enough money to support themselves (or you), or it leaves them struggling to hold down a job while looking after your children.
2. Into your own hands to pay for those things that matter most to you – your goals for yourself and your loved ones, like:

• Buying a first home.
• Moving to a larger (or smaller) home.
• Buying a second home.
• Supporting a child through school or University.
• Going on an extended holiday.
• Taking six months (or two years!) away from work – to write a book, plan a new business or do anything else you’ve always wanted to do.
• Having the choice to slow down at work – or stop doing paid work altogether.

With a sound approach to financial planning, most people discover they can afford some of those things; some that they can afford most of those things, and many find they can afford more than they thought!

Sadly, too many people keep working full-time or in jobs they don’t enjoy – simply because they don’t know they can afford to slow down or stop working.

So, while it might take years to see the outcome of a sound long-term financial plan, you should benefit immediately from reduced anxiety about an uncertain financial future.

And as you explore the possibilities for your future life – and discover what you could do – to make those dreams come true.

Of course, if you struggle to control your spending (and we plan to offer ideas to help you with that, too – so stay tuned), then a financial plan will show you the impact of this – on your future self – and on the futures of those who depend on you.

What’s more, as you near retirement, a good plan will reveal whether you can afford to spend more than you expected.

Or whether you could retire earlier than you’d planned.

So, there is a lot to like about sound financial planning!

What really matters to you?

So, a great financial plan is built on the answers (plural) to one simple question:

What really matters to you?

Or to expand this a little…

What would you like to have, do or become in the future…
for yourself and for any loved ones you wish to provide for.

Only you can decide what you want for the future.

So, it pays to take some time to consider this – in a quiet place with a blank sheet of paper – as we’ll suggest in the next Insight.

However, before you start listing your dreams for the future, you need to know how you’ll attend to your finances in a sensible order.

And this is where we (finally!) start to outline the AWESOME financial planning process.

Awesome starts with the letter ‘A’ – so that’s where we’ll begin.

‘A’ is for assessing areas for attention

As you may know, in any big project, we first scan the likely areas (or workstreams) that we think will need attention.

Only then can we build a sensible (and complete) plan with the detail of what’s to be done in each of those areas?

And we need to do this before we start buying financial products. It’s certainly not a good idea to rush out and randomly start buying these things!

So, at a high level, financial planning is no different to other big projects except that, in this case, the project is about building a better financial life!

And thankfully (unlike projects that have never been attempted before), there is an agreed list of personal financial challenges – and order for attending to them.

All financial planners will suggest you attend to your finances in (roughly) this order:

Areas for attention – priority order

You will want to get into a situation where:

1. You spend less than your income (from all sources) each year. And you have enough (accessible) cash savings for emergencies – like a temporary loss of work or expensive repairs to your car or your home.
2. You’ve made arrangements to provide enough money to any financial dependents in the event of your death or serious disability. And your loved ones have clear instructions for dealing with your financial and material possessions in the event of those disasters.
3. You’re on track to receive a full state pension, and you’re receiving any other state benefits you’re entitled to.
4. You’ve paid off any credit card or other expensive debts.
5. You’ve repaid (or you’re on track to repay) your mortgage before you retire.
6. You have (or you’re on track to build) a big enough pot of money in pensions and other investments to stop or slow down from work in the future?
7. You have (or you’re building up) any additional funds you need (in bank savings or other low-risk funds) to pay for shorter-term goals like holidays, seasonal costs, and car replacement.
8. You have (or you’re building up) additional funds for your other life goals, like those listed earlier.
9. You have a sound plan to generate a sustainable income from your pensions or investments in retirement.
10. If you’re concerned about inheritance tax, you’ve explored ways to mitigate that.
    Some financial planners may have a particular area of expertise – like tax and estate planning or business financial planning.
    
    However, all good financial planners will work with you to attend to those financial challenges.

What about choosing financial products – and investment funds?

Perhaps you’re surprised that we’ve not talked about financial products before now.

And, yes, a good financial planner will ensure that your cash savings and investments are held in ‘money boxes’ and investment funds that are suitable to your particular financial life goals.

Examples of money boxes (or tax wrappers) include Pension plans, ISAs, Lifetime ISAs, General Investment Accounts, Insurance Bonds and more.

These choices are critically important, too.

Holding your money in the wrong box could mean you miss out on FREE money from your employer or the government – as tax relief or savings incentives – making it much harder to reach your financial goals.

If you’re interested, we offer other Insights on how to choose the right money boxes for you – and on how to decide on the right level of investment risk for your money.

Just be aware that these questions can get complicated. So, they’re definitely areas where it pays to take good advice.

You’ll certainly want to ensure you don’t overpay for those money boxes, investment funds or advice on all this.

Financial planning is not common sense!

As we hope you can see, there’s much to think about when planning our money for the long term – and doing this well is not just common sense.

However, once you know which areas of your finances need attention, financial planning is about:

• Deciding what you want (for yourself or your loved ones) in each of those areas – and when.
• Working out how much money to put into which financial products and investments to have a good chance of achieving those goals.
• Setting up the products you need – and automating your payments into any insurance and regular investment and pension plans you have.

Coming up next

In the third and final Insight in this series, we’ll complete the other six steps of this AWESOME process for planning your money.

See you in there when you’re ready for that.

And if you find these Insights helpful, please give them a share.

Thanks for dropping in