During our lifetimes, many of us have aspirations and goals. Inevitably, most of these goals come with a cost.
Common goals are:
- Buying a first car, then keeping a car on the road
- Getting onto the housing ladder, and potentially upgrading our homes over time
- Sending our children to college or university
- Travelling the world
And for many of us, the ultimate financial goal is:
- Being able to retire and abandon the stresses of work without suffering a decline in our lifestyle. This is also known as ‘financial independence’.
Setting, and then saving for, various objectives is essentially another way of describing basic financial planning. So what is the most important element of financial planning? Is there a ‘fix’ or an easy option?
When we go to the doctor with an ailment, ideally we just want a pill to make us feel better.
When we want to get fit, some of us think buying a treadmill is the answer.
When thinking about growing wealth and saving for carefully established goals, some people think financial planning means finding the ‘best’ fund, or picking the ‘perfect’ stocks, and then sitting back and watching goals materialise before them. Indeed, when going to see a financial planner, many people initially think that all they are doing are paying to be told to which funds they should entrust their money.
However, when we go to the doctor or the physio, the solution is rarely as simple as taking some pills. To fix the root cause, we often need to make change, requiring the discipline to change our diets, reduce caffeine or alcohol intake, get more exercise, or perhaps endure a course of physiotherapy exercises.
Similarly we are not going to improve our fitness simply by buying a treadmill. That is the easy bit. Perhaps it is the all important first step in the process, but it is just one small step on a long, steep, and winding life path. We only get fitter by being disciplined, setting a training plan, and embracing the work.
So when it comes to saving for our futures, does financial planning mean simply considering the best return on our capital? Other people may disagree, but we do not think this is the case. Financial planning is a process that is fundamental to making best use of our resources.
So, to the most important element that is, for many people, the least exciting part of the process.
The most important initial element in financial planning is Budgeting.
- Understand what you spend over a year
- Set a budget to cover your living costs and all your holidays and entertainment
- Stick to the budget
- Reduce your short term debts, such as credit card balances
- Establish an emergency fund
- Save what you reasonably can, regularly, towards longer term goals
- Start looking further ahead
Setting a budget is relatively easy; it is more difficult to stick to it! However, having the discipline to take the time and care to record and reconcile your expenditure in some way is what counts. If you can set a sensible budget, work within it, and save what you reasonably can, you are well on your way to enhancing your financial future.
A suitable investment strategy is important, but much like having a treadmill, having a suitable investment strategy alone will not allow you to obtain the results you desire.
People say that “life is what you make of it”. This is never more true than in the context of our goals and objectives. Budget, be disciplined, and your financial future will move towards all that you want it to be.