With the end of 2014 fast approaching, and the imminent arrival of a New Year, I thought that this would be a good time to review some basics of financial planning and why they are so important. At the beginning of the year people often make resolutions about many things, such as getting fit, losing weight, or getting a new job, but how many people decide that they really should review their financial situation, take stock of where they are and consider where they want to be?
This is always a good exercise to carry out on a yearly basis, but it generally needs a “trigger” for it to happen, and if that can be a new year’s resolution, then that is great. So what should you be considering?
The “broad concept” approach can be considered at this stage. This consists of a series of four questions that can be applied to any set of circumstances. Firstly you need to consider where your financial situation is now; then to consider where you would like to be; to review the options available to you, and finally what is the best option for you today? Once these questions have been discussed and conclusions drawn, you should be in a much better position to move forward.
This concept can be applied to three generic questions to ask yourself to assist with your financial planning:
• What would happen to your family or dependents if you died before you have financial security?
• What would happen if you lived too long and your money runs out?
• And finally what would happen if you get sick in the meanwhile?
The first question relates to life assurance. Why do you need life cover? There are a whole host of reasons, but the main one will be to replace you financially in the event of your death. That may sound harsh, but that is what life cover is for. It is to replace the income that you would have earned if you were alive to support your family.
The next issue is to consider your future. Have you saved or are you saving enough to allow you to enjoy the time when you no longer want to work or physically can’t work? If you have already implemented a retirement plan, is it working as hard for you as possible? When did you last review the performance and check where your funds are invested?
Comfortable
If you haven’t started saving, then you may wish to consider what you would like to do to make sure your retirement is a comfortable and enjoyable one. This may involve asking yourself how much you can afford or wish to contribute, or how much you want to have as an income at retirement.
As a very broad guide, to insure that you have a reasonable fund to retire with, you should take your age, divide it by two and use this figure as a percentage of your salary to contribute to your retirement planning.
The third question relates to what is sometimes referred to as financial death. This is when you are still alive but unable to work, usually due to illness or injury.
Some of these questions are quite tough to ask yourself and the issues close to home. But I believe it is better to have discussed the subject and taken precautionary measures, rather than risk being caught out with no contingency in place because by then it will probably be too late to do anything about it.
Your financial planning is an ongoing process and you should be happy that your decisions are the right ones and the arrangements that you implemented are the correct ones for you.
The writer is the Regional Director at Acuma Independent Financial Advice
