At this time of year, we gather our thoughts on things financial and health-wise. In the second of three parts, John Lowe of Money Doctors continues on the path to financial fulfilment with his 15 minute plan….

Getting started: think holistically

Most financial products are bought on a one-off basis. Suddenly you need a mortgage or you fall into the clutches of a life insurance salesman and, bang, you are making major financial decisions before you have time to think. The result is that you may not get the best product for your needs… or the best value. Every major financial decision you make should be part of an overall plan. Thus, a particular product, such as a mortgage, loan, insurance policy or investment, should be judged not just on its individual merits but also in terms of how it moves you closer to where you want to be.

Dream, dream, dream, dream, dream, dream

The Everly Brothers had a point. Dreaming has a huge role to play in financial planning. Consider what you’d like to be doing in, say, five years, ten years and twenty years. Consider what work (if any) you’ll be doing, where you’ll be living and how you’ll be spending your leisure time. What will your family situation be? What – and this is key – will your financial situation be? Once you have a clear picture of the future life you’d like to have, you can start expressing it in financial terms and working out how to get there.

Setting your financial objectives

Once you have an idea of how you want things to turn out, you can start to think about what your precise financial objectives are. Obviously, these are going to vary according to your age, circumstances and desires. If you are in your first job, you are going to be thinking rather differently from someone who is approaching retirement. Therefore, you may find it useful to divide your financial objectives into the short, medium and long term. Let me give you a simple, real-life example:

Paul is 29. He is a teacher. His short-term financial objectives are to get rid of his credit-card debt (left over from university), start building up some savings and buy a car. His medium-term objective is to buy a home. His long-term objective is to earn some extra income with which to boost his pension, since he has decided he wants to retire when he is 55.

Setting and prioritising your financial objectives is hardly rocket science, as you can see.

Checklist to help you decide what you want

What should your financial objectives be? Here are some options:

  • Having an emergency fund to cover unexpected expenses.
  • Paying off any personal loans, credit-card debt, overdrafts, store cards, hire purchase, leases, other debts or ransom notes (just checking you were paying attention).
  • Building up short-term saving for cars, holidays and so forth.
  • Protecting your most valuable asset, your income, in case you are unable to earn money for any reason.
  • Protecting yourself (and, if relevant, your partner) with life cover.
  • Starting a pension plan.
  • Buying a home (probably with the help of a mortgage).
  • Saving for major purchases.
  • Planning for education fees (if you have children), whether for private school or university.
  • Building up your personal investments.

To this, I suppose we could add planning for long-term care, if you’re worried that your pension and/or the State and/or ungrateful children may not provide for you sufficiently in your very old age.

In part 3 next week, I will give 5 useful tips in financial planning among other things.

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