topic 5

• Purposes of financial planning

  Achieve aspirations and finance life events
• Life events


  • Going to university
  • Buying a car or house
  • Starting a family
• Retirement


  • Live long enough to retire and enjoy comfort and leisure in old age
• Death


  • Consider how death might affect others financially and make plans accordingly
• Factors affecting what people plan for

  • Family situation
  • Financial situation
  • Attitude to risk
  • Current lifestyle and expectations of how this might change
• People should allow for unexpected events in their financial planning
• Positive unplanned events


  • Bringing in more money
• Negative unplanned events


  • Spending more money, such as a car breakdown
• Discipline in financial affairs


  Setting a goal and trying to achieve it
• Features of effective financial planning

  • Realistic
  • Timely
  • Clear
  • Flexible
  • Documented
• Budgets


  A monthly personal financial plan showing expected income, expenditure and end-of-month balance
• Cashflow forecast


  A tool for monitoring and controlling financial plans
• The planning process


  1. Decide on aspiration

  2. Establish realistic timescale

  3. Establish starting position

  4. Establish priorities

  5. Document the plan

  6. Implement the plan

  7. Review progress
• Deciding on realistic aspiration

  Consider factors that affect a person's aspirations, such as health history and risk appetite
• Establishing timescale


  Be clear and realistic about the time allowed to achieve the goal
• Establishing starting position


  Audit current resources including balance of accounts, income, expenditure, assets, liabilities, net worth, and current provisions
• Establishing priorities


  Narrow down goals, consider opportunity cost, and provide for security and protection
• Documenting the plan


  Write down starting point, goals, timescale, priorities, risks, and actions to be taken
• Implementing the plan


  Limit expenditure to less than income to achieve monthly surplus for savings, or set up repayments for loans
• Consequences of missing loan repayments include having to make double repayments later, penalty charges, and increasing debt
• Reviewing the plan


  Regularly review due to changes in financial environment and personal wants/aspirations
• Using financial products


  Borrowing, saving, insurance, or a combination to meet financial goals
• Consequences of failing to do financial planning include being less likely to achieve wants/aspirations, not being in control of finances, and damaging financial reputation/creditworthiness