When I was a financial planner some years ago, I took on a new client who had sold his business for many millions but worried about running out of money. “I know I have a lot of money, but I have no idea how much it’s safe for me to spend,” was how he put it. 

His problem may be familiar to many well-off people, whether they are still accumulating or living off their wealth: he had no context for making financial decisions. 

Although he had a net worth of several million pounds, his expensive lifestyle was unsustainable. Making money is one thing. Keeping hold of it so it lasts your lifetime and potentially for future generations is quite another.

This might be a problem that many Britons would like to have as they struggle through the cost of living crisis. But the truth is that a financial plan can help at many income levels.

Recent research by the Institute for Fiscal Studies, which found that more than four in 10 people in their 50s and early 60s who had a defined contribution pension did not know how they planned to access their pensions. It underlined the point that without a plan, they risked making poor financial choices. 

To be clear, a financial plan isn’t a lengthy written report. It is a structured and logical process for making wise financial decisions, composed of several elements.

  1. Articulating your personal values and what makes you happy and fulfilled;

  2. Setting clear objectives, priorities and milestones for measuring the progress and sustainability of your wealth;

  3. Choosing financial planning assumptions that are reasoned and reasonable, such as inflation, investment returns and tax rates;

  4. Detailing your financial planning strategy — how you’ll allocate your wealth between funding your lifestyle, possessions, liquid savings or investments and other assets such as business holdings;

  5. Deciding what actions you’ll take if things turn out better or worse than anticipated;

  6. Detailing the key people involved in managing your plan, including in the event of your incapacity or death.

On the first point, my experience is that few people who undertake this process have really thought about what a “good” life looks like to them. Either they are busy trying to earn or make money, thinking that will make them happy and fulfilled. Or they define their self-worth and identity through their career or business, failing to acknowledge that the most precious thing they really have is the time they have left to live.

Money should be a means to an end. Focus on understanding your values and the lifestyle that brings you fulfilment so you can work out the role that money plays in achieving that.

People also need to measure their financial progress. They need a broader context for managing the inevitable nasty surprises that life and investment markets will throw at them. In more than 1,000 client interviews I conducted as a financial planner, I found that few people had clear financial goals, but they could usually define a range of priorities and needs. These are better described as milestones than goals because they indicate the direction someone wants to go, rather than an all-or-nothing achievement.

It’s better to split these financial milestones into priorities that allow you to adapt to outcomes in the real world. So a post-work lifestyle costing, say, £60,000 a year, would need to be broken down into three different amounts: your needs would be either required, desired, or aspired

The required lifestyle is the minimum amount needed, say £30,000 a year. The desired amount might be £45,000 a year. And the aspired spending might be £60,000. If investment returns are lower than assumed, the aspired or possibly even the desired spending takes a back seat, not the required spending.

This approach of prioritising needs has been adopted by the Pension and Lifetime Savings Association (PLSA), a trade body for workplace pensions, using independent research developed at Loughborough University. The analysis allows the costs of a particular retirement lifestyle — minimum, moderate or comfortable — to be quantified for singles and couples, as shown in the table. 

You can apply the same prioritisation approach to other needs or such that, for example, you only make gifts if your wealth is above the level you had planned for.

It’s also important to be aware how major economic factors — such as inflation or interest rates — will affect your plan. Data from the Bank of England, for instance, can help you think about short and long-term financial forecasts, with various possible outcomes centred around a central or most likely outcome.

These forecasts are just educated guesses about what might happen in the future. They will almost certainly turn out to be wrong. But having a personal wealth forecast based on realistic assumptions about inflation, investment returns, spending, earning and tax rates can help you make better financial decisions and increase the odds of success. 

I’m not too fond of the term “budgeting” and in my experience most people resist it too. It is better to make a yearly spending plan, which you keep regularly updated, setting out the spending items you consider essential, those that are part of your future planning (including gifting) and “fun” purchases. 

Combining your yearly spending plan with a regularly updated long-term forecast of your net worth helps you work out whether you are on track. If you aren’t, you might be able to change elements such as lifestyle spending, working longer (or going back to work), changing your investments or downsizing your home earlier.

Having a clear idea in advance of how you will respond to, for example, a significant fall in your investments, higher taxes or higher inflation reduces the likelihood that you’ll do something stupid. 

Every year, you should carry out a “money MOT”. Make a checklist of routine financial actions such as utilising Isa and pension allowances, capital gains tax exemptions and annual gift allowances. Take some time to consider other actions that might be needed less frequently, such as revaluing properties, updating wills and reviewing your charitable giving and legacy planning.

Your financial plan must also detail all the key people involved in your finances — the people who will oversee and make financial decisions in the event of your incapacity or death as well as the professionals who administer your affairs.

When my old client died suddenly just a few years after I had started working with him, his widow had the comfort of knowing that she and her children would be comfortable financially. The plan was organised and everyone knew their roles and responsibilities

Some people have the skills, time and inclination to create and manage a personal financial plan. But if not, hiring a chartered or certified financial planner might be a good investment. Bear in mind that you don’t always have to pay down a percentage of your assets for this service: many firms now offer financial planning on a fixed monthly subscription basis.

A financial plan won’t guarantee financial success or happiness. But going through the thought processes that lie behind it will help you feel more confident of your realistic options. 

Jason Butler is an expert on financial wellbeing and presenter of the “Real Money Stories” podcast. Twitter: @jbthewealthman. He is head of financial education at Salary Finance


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