Plan – Elements 3


This post is part of the Elements series, a Periodic Table of all the Investing Elements that you need to take control of your financial life. You can find the rest of the posts here.

Financial statements

What is it?

A Plan is a document designed to help you cope with all the bumps in the road ahead, and help you to reach your destination.

It sets out your financial goals (how much money you will need at which points in the future) and explains how you will get from here (as detailed in your Financial Statements) to there.

What kind of element is it?

Your Plan is a document (usually a spreadsheet).

Who needs it?

Everybody needs one. Left to themselves, people focus on the short-term.

  • Sticking to a plan brings the far-off into the immediate and what would be done tomorrow into today.
  • We can also test out our plan against a range of future conditions.

What comes before it?

As we’ve said before, the order in which you create your documents is up to you, but your budget, net worth and Plan they all need to fit together.

Most people would probably come up with a budget first, to make sure they are spending less than they earn.

Once you have cleared your debts and built up an emergency cash reserve (six months of expenses), then you are ready to build a Plan for the longer term.

What comes after it?

Once you have a plan, you will need to implement it.

So you’ll need to start choosing asset classes and assets and products into which you can invest your annual surplus.

And when you draw up your financial statements each year – usually at the end of the calendar year or the end of the tax year, you’ll need to review your plan in order to make sure that everything is still on track.

What age do you need it from?

As soon as you decide to take control of your financial situation (live within your means, clear your debts, save for the future etc).

Hopefully, this will be before you are aged 25, but some people start as late as 45.

What age do you need it until?

You need it for as long as you are actively managing your own portfolio.

There will be a change in the way that your plan is managed when you switch from accumulation (saving) to decumulation (spending), but unless you plan on taking out an annuity, you’ll need to make sure that your funds will last for the rest of your life.

Barring mental incapacity, it doesn’t make financial sense to take out an annuity before age 75, so you should normally expect to review and update your Plan each year up to then.

How much does it cost?

It costs nothing except your time to prepare and review a Plan, since you will be doing it for yourself.

Assuming that you are reasonably well-organised and you don’t have particularly complicated financial affairs, making and monitoring your Plan will probably only take up a few hours of your time each year.

What’s in it?

See also:  OEICs (Funds) - Elements 6

To an extent, the contents of your plan depend on you and your circumstances.

Let’s start by looking at the (financial) stages of life:

  1. school
  2. starting work
  3. setting up home with someone (perhaps)
  4. kids (perhaps)
  5. retirement

In each of these stages your income and expenses will change. And so will your goals.

Working out your initial Plan involves four easy steps:

  1. Work out where you are
  2. Work out where you want to be (your goals, in financial terms)
  3. Make a list of the options for getting there (which investments you might use to grow your money)
  4. Work out which option(s) is/are best for you

Then you set about implementing the best option(s), and periodically (usually once a year), you look at where you are again (which is step 1 for next year).

The most important step is to identify your main financial goals.

  • You may only have one, but you shouldn’t have more than say five.
  • Financial independence – financial security – should be at the top of the list.

The main financial goal in life is to build up a pot of money to provide income in retirement.

  • Your number one target should be the ability to meet your needs from what you already have, without further income from outside.

Other common goals along the way to retirement include:

  1. saving the deposit for a house
  2. paying for school/university fees
  • You need to represent each of your goals as a sum of money and a date – how much you will need and when.

What does a good one look like?

A good plan will have integrity – it will balance.

It will show that you are saving enough money each year – and investing it wisely – so that you will meet your long-term goals.

If your Plan doesn’t balance then you need to find a way to save more (by earning more or spending less, and modifying your Budget accordingly).

Alternatively, you need to adjust your goals (by making them less costly, or moving them further into the future, or by eliminating one or more of them).

It may take a few iterations, but you need to make the Plan balance.

What does a bad one look like?

A bad Plan will be missing information (goals, savings, investments) or will include misleading information (optimistic assumptions about the future, whether it be pay rises, spending cuts or investment returns).

Any recommended brands?

There are no brands here, this is a do it yourself product.

It’s always possible to get a financial advisor or planner to do this work for you, but that would be expensive, and would mean that you didn’t “own the numbers” in the same way that you will if you prepare the Plan yourself.

What are the main risks?

The main risk is not preparing a Plan at all.

After that, the second risk is not using realistic numbers, or leaving some things out.

The past is not a reliable guide to the future, but it’s all we’ve got. You should be confident that your Plan would have worked well nine times out of ten in the past.

How do you deal with these risks?

See also:  Financial Statements - Elements 2

If you have a financially savvy friend or relative, and you are willing to share your plans for your future with them, it’s not a bad idea to get a second opinion.

Otherwise the best idea is to write a draft Plan, step back from it for a week or two, then do the same thing all over again (without looking at the original Plan).

Then you can compare notes between the two. A composite Plan made from both drafts should be pretty good.

Until next time.

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 40 years, with some success.

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Plan – Elements 3

by Mike Rawson time to read: 4 min