Getting Started with Financial Planning

25/04/2024

As a Certified Financial Planner, I come across a lot of people who want to get started planning for the future but don’t know where to start.

Typically these people will have settled into a career and have a good level of surplus income and rather than leaving their excess savings in cash they want to invest to try and make their money work harder for them.

Before any conversation around investing can take place, it’s important to cover the basics

Spending Less than you Earn

The first step to financial freedom is getting to the point where you are spending less than you earn. This always starts with taking stock of what you spend each month. Be honest with yourself when doing this!

If you have tallied everything up and you are spending equal to, or more, than what you earn then there are two actions you can take. Either you can spend less, by cutting out non-essentials, or you can earn more. Earning more may or may not be easy depending on what you do. Perhaps you have kids and a demanding job and there just isn’t the bandwidth to do any more work. Maybe you could negotiate a pay rise or go for a promotion?

Once you have got yourself to a point where you are spending less than what you bring in each month you have now got a surplus of income which you should use as follows:

Paying off Debt

If you are carrying any overdraft, loans or credit card debt it is best to try and use your surplus cash to tackle these first before you start your financial planning journey.

It is not to say that you cant start with the next steps but they will be more powerful, and quicker to achieve if any unnecessary debt is paid off first.

In terms of what debt to pay off, the answer differs amongst financial planners. For me, I view mortgages and car loans as part of life and would focus my attention on paying off any credit cards, overdrafts or personal loans.

If you have debt to pay off and are not sure where to start, you can check out my blog on Paying Off Debt – Where to Start.

Emergency Fund

Once your debt has been paid off the next step would be to protect against disaster. The first step for disaster prevention is to get an emergency fund together equal to around 3-6 months of expenses. So if your essential bills are £1,500 per month then your emergency fund should be between £4,500 and £9,000, whatever you are most comfortable with.

This is the first step to insuring your loss of income should you be unable to work. Not only is it a pot you can draw from if you have an unexpected expense, but if you do lose your job or have to take a few weeks off sick, this will cover you. And then you should consider insurance to pick up from there.

Insurance

If you have debts and loved ones who are dependent on you, then you should consider life insurance and possibly critical illness cover too. I appreciate that it seems expensive for something you hope to never need, but if you do need it, trust me that you will be very glad you took the cover out.

Another important insurance for starting to plan for the future is Income Protection insurance which will replace your income should you be unable to work through illness or injury. This is an often overlooked insurance that I believe everyone with an income should have. To find out more about insurance please visit my blog post called The Importance of Insurance.

Investing

Once you have established a monthly surplus of income, cleared your debt, built an emergency fund and insured against the worst happening you are ready to start investing for the future.

To learn the basics of investing please visit my post The Basics of Investing.

Matt