Setting clear financial goals
The importance of defining short, medium, and long-term goals should never be underestimated. There's no better feeling than ticking an action item off your to-do list; it feels like you're making progress and you've done something. Counter this with a starting point and end point and nothing in between—it's a long journey!
As we will cover in this article, when looking at wealth management, we all tend to focus on wealth creation. However, it's just as important to factor wealth preservation into your financial planning as part of a broader approach.
Some of the typical financial goals include:-
Short-term (up to 1 year)
When looking at short-term finances, this will depend upon your particular circumstances but can include issues such as:-
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Creating a monthly budget—taking into account income, expenses, and savings, it's important to have a monthly budget to fall back on, even though it can be subject to change!
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Building an emergency fund—saving between three and six months of living expenses in case of unforeseen emergencies creates a short term financial safety net.
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Pay off high-interest debt—while not always easy, paying off high-interest debt where possible can save you a lot of money later.
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Saving for specific purchases—whether looking at a new car, vacation, or home improvements, it's always good to have something to aim for.
As we saw during the recent cost-of-living crisis, it may be difficult to build an emergency fund in the current environment, but that doesn't mean it can't be a longer-term aspiration.
Medium-term (between one and five years)
Once you move on to long-term financial planning, you will start to understand the broader picture, the short-term targets and the sense of progress. When looking at your medium-term financial future, you may see a lot of topics emerging, including:-
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Saving for your first home—unfortunately, many people are struggling to find the deposit required for their first home, but the earlier you start, the greater your chances of securing that dream home. While this may be a medium-term aspiration, as soon as you are employed with a regular income, it would be helpful to start putting money away.
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Education fee planning—as you begin to look towards the purchase of a home, perhaps moving from a rental property to your own house, your family may begin to grow. This can prompt a very different outlook on your finances and may include plans for an education fund, even though it may seem many years down the line!
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Insurance—as your family grows, along with your financial commitments, insurance policies will likely become integral to your long-term financial planning. Life insurance will give your family a financial nest egg in the event of your death, paying off any outstanding mortgage and other debts you may have accumulated over the years.
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Debt repayment plans—It's essential to appreciate that debt is not something to fear. It is something to respect, but it can help you get from A to B much quicker. Consequently, when looking at your medium-term financial goals, if you have accumulated debt in the early years, it's important to have a plan to control it and then pay it off.
Short-term financial planning tends to revolve around budgets and everyday living expenses, moving on to an element of wealth preservation. We will now look at the longer-term plans, which can start as early as possible and tend to have a longer investment horizon.
Long-term (5+ years)
While short to medium-term financial planning is crucial and more focused on financial management, long-term financial planning is the backbone of your future. There are many factors to consider, such as:-
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Retirement planning—aside from the fact that this allows you to plan literally for the future, your retirement, there may be tax benefits associated with pension contributions and savings. It's important to appreciate that retirement planning is not just pension planning and incorporates your wider investments and assets accrued over the years.
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Pension planning—this is a critical element of your retirement planning. It is a tax-efficient means of saving for the future and investing across a range of assets. In the early days, you may be focused more on growth opportunities, switching to a balanced approach in midlife and being more income-oriented towards retirement.
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Investing for long-term growth—outside of your pension assets, there may be other tax-efficient vehicles to consider. Many people look towards regular investment plans, putting an element of their income towards mutual funds as well as advisory/discretionary management arrangements.
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Estate planning—planning for your demise may not be easy, but it's essential to implement a tax-efficient strategy for your estate. This can help significantly reduce any tax burden on your death and ensure that your beneficiaries receive the maximum assets possible. Estate planning can be a slow burn, often meaning the benefits of actions taken today may not fully materialise for decades. But it's still worth it!
Whether looking at retirement planning, pension investment or more general investment, historical data shows that long-term strategies tend to perform best. While understandable, many investors will panic at short-term volatility, which, even in a best-case scenario, means reacting after the event. This is not the primary challenge; timing your re-entry to the market can be most difficult. Time spent out of the market can negatively impact your long-term returns more than the time spent in the market.
Assessing all aspects of financial life
There is a tendency to assume that comprehensive financial planning relates specifically to investment when it should be considered more of a holistic approach. This involves taking a broader view of your finances, including budgets, debt, and investment together with short, medium and long-term targets.
Looking at each of these in isolation gives you a greater understanding of your finances and helps create strong foundations on which to build for the future. This also allows you to integrate different strategies and assess and address potential risks as they emerge in the future.
Integrated strategies
In isolation, topics such as investment, taxes, insurance and estate planning are important to your long-term financial well-being. Integrated, they create a much more powerful tool which allows you to optimise long-term returns by:-
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Aligning your attitude to risk with your investment strategies
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Focusing on specific timelines for different elements of your finances
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Minimising your tax liabilities
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Maximising your financial returns
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Introducing an element of wealth protection (insurance, diversification, etc.)
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Using all possible allowances and tax breaks
For those who take a proactive approach to estate planning, this is the umbrella under which all of your investments and finances are managed. Aside from the obvious financial benefits, this degree of planning and vision going forward can reduce concern, confusion, and financial stress.
Identifying and mitigating financial risks
While strong fundamentals, discipline, and long-term planning can change your financial outlook, it's important to maintain a degree of flexibility. Lifestyle changes, the economy, and income fluctuations will likely see you to face numerous financial risks over the years. In tandem with your financial adviser, it's important to calmly and carefully identify and mitigate these risks as soon as possible.
As we touched on above, knee-jerk reactions to market volatility can significantly negatively impact your returns going forward. The opportunity to discuss potential risks with your financial adviser, identify solutions and strategies going forward, creates a helpful environment in which to make the right decisions. It's also important to recognise that your attitude to and tolerance of risk will change over the years, reducing as you get older, creating a more predictable and dependable income stream later in life.
The importance of regular reviews
The digitisation of the financial services industry means that we can communicate at the touch of a button and access real-time information and reports. In theory, it is possible to monitor your investments in real-time, but this should not deflect from the importance of regular formal reviews. This is not just an opportunity to review performance statistics but to take a wider look at your changing financial landscape.
It's also important to inform your adviser of changes to your personal and financial life and update them on any adjustments to your long-term aspirations. Personalised financial advice is critical in the modern era, but it is only possible if you inform your adviser of the relevant changes.
Conclusion
It's important to take a broader, more holistic approach to your financial planning rather than focusing on individual elements in isolation. While we have compartmentalised short, medium, and long-term planning, flexibility is also critical. The introduction of financial goals allows you to map your progress effectively and make adjustments where perhaps your targets were out of sync.
Comprehensive financial planning is your long-term roadmap. There may be detours, you may run short of fuel from time to time, and you may be forced to take a break. However, this does not mean that you can't remain focused on your long-term targets and financial aspirations.
Contact Scott Kingsley today if you would like to discuss your long-term financial plans in more detail. There is no charge for a chat, and it could be life-changing for your finances.
Scott Kingsley, Financial Advisor at Misthos Group.