How to Develop a Financial Plan and When to Do It
Should you employ a professional financial planner for a detailed roadmap of your financial journey?
Or can you develop your own plan, keep moving in the right direction and review and adjust along the way?
I’ve included a graph for the science lovers (based on “Observational data”). This one demonstrates my observation of doctor planning temperaments compared with the general population.
Clearly, I am on the extreme left – hence my need to research each financial decision in such detail I may as well write the article and share online!
If you “Wing it” completely with finances (by ignoring them), it is very likely you will end up with inadequate investments to live your ideal life in years to come.
Time spent developing a plan will get you closer to your goals (even if you don’t really know what they are yet).
A rigid plan stuck to without wavering may be best for those with definite goals and time frame, and to whom a “Set and forget” plan is appealing.
But life plans and financial markets change, presenting opportunities and challenges along your journey, sometimes best served with some flexibility with planning.
Financial Checkpoints During Your Career.
Significant pay changes or life events (co-habitation, separation, starting a family) are important opportunities to assess your long-term financial situation and make or adapt a financial plan.
At entry to internship it’s possible to maximize the power of compound interest with tiny amounts of savings ($100 / fortnight?) for incredible results over 30-40 years.
Amount invested per fortnight
Projected balance at 7% growth
When moving up to registrar, most receive a significant bump in pay – an opportunity for lifestyle inflation or getting long-term financial plans on track.
Starting work as a General Practitioner or Hospital Specialist involves another bump in pay, though with less time for compounding, still a significant opportunity to save and invest.
Pre-retirement – A check-in 10 years before retirement is important to ensure you are on track.
These review and plans can be performed with a professional, or independently depending on your financial literacy, complexity of investments, personality and time.
Should You See a Financial Planner to Develop a Detailed Financial Plan?
Seeing a financial planner can help non-planners start setting goals to work towards.
The deadline of an appointment demands answers to the tricky questions such as home and travel aspirations, child education costs, expected retirement age and income for an acceptable retirement lifestyle.
For the younger folk, setting these big goals seems overwhelming.
When retirement is 30-40 years away, how on earth do you work out the income desired? It’s easy to put it in the “Too hard basket”.
Face the tough questions now, knowing the answers won’t be perfect. Your goals can always change, but working towards a plan is likely to land you in a better financial situation than burying your head in the sand.
For those that tend to worry, a professional financial plan can provide a sense of certainty and reassurance.
For those with an ambitious target or tight time frame, a professional can help work out if your target is realistic, and form a plan likely to achieve your goals.
If you come in to a significant lump sum windfall and don’t have a plan for it, it’s best to find a trustworthy professional to get a sensible plan. It’s important to avoid falling for a scam or impulsively speculating in risky investments.
Individuals with only basic understanding of finance, and little interest or time to invest in the topic will benefit from using a carefully chosen professional.
Having a written plan (professional or otherwise) can help you stay the course when the inevitable market crash occurs.
A dip in the market (Property or shares) is a valuable opportunity to take advantage of the coming recovery by pouring as much in as you can manage.
But a fall in stocks tends to prompt the opposite behaviour. Panic selling at the worst possible time locks in a loss.
A written plan stating your behaviour if your asset value falls (10 or 20%) to invest a planned amount more per pay, or continue with original plan regardless.
A professional financial plan is an expensive exercise ($2000+) so you want to time this carefully to get the most value.
The plan can only take into account your situation at the time and anticipated future circumstances.
Life often changes far more rapidly than we anticipate, sometimes making a plan irrelevant in just a few years.
If you are paying for a financial plan early in your career, it is worth checking the cost of plan reviews and adjustments.
Your plan will be based on the current assets you own (superannuation, property and other investments outside superannuation) and estimated future performance of those, as well as continuing investments. Anticipated growth is based on long-term historical performance.
Past performance is the best indicator we have, but does not always predict future growth. 1-2% error in estimated growth can make a huge difference to your situation in 30 years!
We may be about to enter a disastrous or amazing decade for investing – nobody really knows!
Yearly Contribution x 30 years
The closer you are to your goals, the less important the anticipated growth and inflation, and therefore the more accurate your plan is likely to be.
By the time you are 10 years ahead of retirement you really want to be confident you will hit your goal on the current trajectory.
If you have left it later than this, it may be a little belated to make magnificent changes to your financial situation, but a professional can help work out where you stand and how your options weigh up (Working longer, downsizing home, retiring with less).
The timing of your plan in relation to market movements may result in over or under estimation of your projected growth.
Plans written during a bull market (when markets are hitting all-time highs, as currently) may overestimate. Those formed during a bear market (when the stock market falling, on the news daily) may underestimate.
The most important issue if you decide you would like a professional plan will be to find a trustworthy, qualified and competent advisor.
Professional or Otherwise You Need a Financial Plan
Preparing for a Financial Plan
Whether you are seeing a professional or developing your own financial plan, you will need to gather lots of information, and make some decisions before working out a plan.
Especially if you are paying for a plan, make sure you have enough time to work through this properly to get the most value for your financial planner fee.
Start by brainstorming your hopes and dreams over the next 40 years, with your significant other if you have one.
Divide them into time frames. What would you like to achieve in the next 5 years, 10 years, 20 years etc.
Estimate the age at which you would like the choice to retire. Are you happy with that being your preservation age (bearing in mind this may change in line with the ageing population)?
If you want more control over your retirement age you will need some assets outside of superannuation.
It can be intimidating to estimate your desired retirement income 30-40 years in advance.
Consider your current expenditure as if you were retiring this year. This can be performed manually (for example calculating spending over a 3 month period) or through one of the banking apps designed for this purpose.
Which of your professional expenses will disappear – commuting, work clothing, AHPRA and college fees?
Will you still need any personal insurance? Will you still be paying premiums?
Do you currently have children at home that will be independent by the time you retire?
How much do you currently spend on travel? Is this enough to maintain your traveling aspirations in retirement?
Come to a figure in today’s days dollars. This is your retirement income in today’s dollars.
You will also need to know what assets you currently own, and how much you are currently contributing to superannuation and other investments.
The final information you will need is whether you have any surplus income you can put towards your goals.
Analyse recent spending. Do you have a surplus already? Is there spending you would be happy to cut back on to produce a surplus (or grow a bigger one).
List any further assets, liabilities and income from all sources.
Developing a plan
Your superannuation fund likely has some extremely basic modelling for projection of retirement income. Read all the small print to ensure whether it is taking into account fees and insurance premiums.
Each retirement calculator uses different assumptions so comparing a couple of calculators.
Is there a gap between your projected retirement income and the income you desire? Calculate how much you need to invest (inside or outside super) in order to fill the gap before your desired retirement age.
At the early stages of your career, it may seem impossible to get a realistic idea of your situation, and a professional plan too expensive.
Investing something ($100/pay) – and increasing that every year (1/2 of pay rise?) is a great start.
A formal finance review and plan can then occur mid-career to assess what adjustments are needed.
Investing automatically via direct debit (and ignoring the market dramas) is the easiest way to slowly grow financial security and freedom.
Where will you put these savings? This depends on what growth you need, your risk profile and what suits your situation. For long-term goals, you will need to outgrow inflation (~3% long-term).
Professional advice, robo-advise or lots of personal research are your options in deciding which way to go.
If your plan is more complex, involving investment properties and/or debt, it is likely worth paying for either a professional planner or purchasing financial projecting software.
At certain times of life, a detailed professional financial plan may be a good plan – Coming in to an unexpected large sum of money, or other large and unexpected changes in circumstances, starting a family, and planning for retirement.
But an independent professional plan is an expensive exercise, and it is all based on educated best guess assumptions for future growth.
If your finances are fairly simple, many choose to work on their own financial plan, working on rough estimates to get them closer to their intended goal without the large expense of a professional plan.
The one thing that is absolutely no use is to stick your head in the sand. It is important to have an idea of where you currently stand financially, set goals and work towards them.