BrilliantWithMoney

Recent events in the global banking system have brought personal financial planning into sharper focus. It used to be fine to bumble along, month at a time, with minimal control over your money. It probably isn’t fine now.

The combined impact of the ‘credit crunch’, falling stock markets and job losses has pushed financial planning to the top of many agendas. But how should you go about constructing your own financial plan?

Assuming you want to take the DIY approach, here is a quick guide to writing your own financial plan.

What is the point?

Getting various elements about your personal finances down on paper is a valuable exercise. Many of the clients we work with on an advisory basis tell us that, after completing our confidential financial questionnaire, they understand for the first time in their lives where their money is. And that is before we get to the really valuable part of financial planning.

Constructing your own financial plan will create this clarity, and much more. By getting a complete record of your current financial position and intended destination recorded in a written document, you stand a much better chance of understanding the steps you need to take.

Writing a financial plan should also enable you to identify risks. At the simplest levels, writing down your current assets and liabilities should highlight one set of financial risks were you to die. An analysis of your annual expenditure might also open your eyes to the true cost of your lifestyle; a cost that could be difficult to meet should you lose your job or be unable to work.

How do you get started?

Once you have decided to write your own financial plan, you need to get organised. Your financial record keeping might already be exceptional. More typically it will be a bit jumbled. A new client arriving at our offices with a couple of carrier bags full of paperwork is not an unusual sight.

Arch-lever files with dividers for different policies and accounts are a great idea. You might have one file for policies, a second for accounts and a third for bills. Getting into the habit of filing these away when they arrive in the post (or into virtual files if you receive them by email) makes life much easier in the future.

To put yourself in the strongest position to write your financial plan, you should obtain up to date valuations. Most product providers only issue statements once a year. A lot can change in twelve months. Use the Internet or call your providers to request a current value and any other information you feel might be missing.

Once you are organised and have up to date figures, it is time to start writing.

What should a financial plan contain?

There are no absolute rules for the structure of a written financial plan. It makes no sense to construct a masterpiece if you can get the same result by jotting down a number of key facts on a few sides of A4.

The minimum content you will probably want to cover is a record of your assets (the stuff you own), liabilities (what you owe), income and expenditure.

A more comprehensive financial plan is likely to be split into several sections. Here is a suggested structure for a DIY financial plan you should be able to put together in an evening:

-Assets – make a note of the items you own. This should include your property, cash deposits and any investments. It is a good idea in this section to keep a record of your net worth (assets less liabilities) which you can update each year as a historical record of your financial progress.

-Liabilities – record details of any liabilities, including your mortgage and personal loans. Within this section of your financial plan you should write down the level of each debt, repayment structure and applicable interest rates. Having this information in one place will make it easier to prioritise which debts to reduce.

-Income and Expenditure – If you already have a written budget then this section of your financial plan can simply be a summary of these details. Try to make a distinction between committed and discretionary expenditure.

-Personal risk management – within this section you should try to consider any potential risks you face (death, disability, etc) and the likely financial impact on you and your family. This is also a good place to record the details of any protection policies, such as life assurance, you already have. Remember to include details of any death in service benefit from employment.

-Retirement planning – within this section you need to think longer term. Consider what your expenditure might look like after your chosen retirement age and then calculate the pension income you will need. This should enable you to work backwards to determine the level of pension and other retirement funds you will need in old age. You should record details of any existing pension benefits here.

-Other issues – this is a bit of a miscellaneous section where you can make a note of any short-term financial objectives or issues you have missed elsewhere. Remember to consider things like writing a will and putting in place a Power of Attorney.

-Plan of action – work your way back through the financial plan and use this section to record a summary of any action points. This might include how you will save your money each month, any existing financial arrangements you need to change or replace, or how you intend to repay debt. Keep this simple, but make your action points SMART (specific, measurable, attainable, realistic, time-bound).

-Reviews – There is no sense in constructing a financial plan today and then never reading it again. Make a note here of how frequently you will review your financial plan and how you will monitor your progress. Make yourself accountable to someone if that helps. Put a date in your diary now for the next review of your financial plan.

Make your life easier

There are a number of things you can do to make your life easier when writing your financial plan.

It is a great idea to use appendices. Trying to get all of the detail into each section of the plan can be difficult but will also make it harder to read afterwards. By pushing any detail, such as calculations, into an appendix you can point to this in the main body of the financial plan but keep the complex number crunching out of immediate sight.

You might also find it easier to use your financial plan if you include some charts or tables. For example, by using spreadsheet software you can easily turn a summary of your expenditure into a pie-chart to graphically represent where your money is going each month or year.

In summary

Writing your own financial plan does not need to be difficult. Completing this exercise should put you in a much stronger position to understand your current financial position and your longer term financial goals. By doing this you should be able to spot some of the actions you need to take.

At worst, getting organised and writing your financial plan will clear up a lot of errant financial paperwork and allow you to sleep easily at night, safe in the knowledge that you have covered off any financial risks faced by you or your family.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.