Sometimes the easiest way to understand something is to look at a diagram or picture.
In finance, we’re often presented with graphs and flow charts to illustrate concepts and outcomes and these visuals can often tell the story much quicker than a sea of text.
In financial planning, there is a concept or approach known as the Financial Planning Pyramid, which is designed to help clients to visualise the financial planning process, understand where they are in their financial life cycle and prioritise their financial goals.
And here’s one I made earlier . . .
There’s no need to go into explaining it in detail here, but hopefully, the illustration alone should provide you with a decent idea of how you should structure your financial planning, i.e. have the base in place before you start worrying about the capstone (which, pub quiz fans, is actually called a pyramidion. See, you learn more than just finance here, people!)
Now, of course, not everybody’s circumstances and situations will necessarily fit perfectly into this model. However, I think it serves as an excellent framework within which we can work.
The idea is that certain elements of financial planning should be established before engaging in the next one.
For example, having a handle on cashflow, setting aside an emergency fund and ensuring that you have necessary basic insurance are all things that should (in an ideal scenario) be in place before you start looking at investing.
Again, in reality, things don’t always work out in that sequence, but if you can use it as a guide, you shouldn’t go too far wrong.
I think it is actually a really good tool that is often overlooked by too many financial advisers these days.
Unfortunately, in the international financial services especially, the advisers are so focused on getting the client to buy their financial products that they only pay lip service to the actual useful planning stage, which quickly goes out of the window as soon as they have ascertained that there is some disposable income up for grabs.
Yes, you can call me cynical if you like, but I have witnessed it all too often!
So, before you visit a financial adviser with a view to making investments, here are some things that you can and should take care of yourself first.
I’ve broken it down to 7 very simple things.
And here they are:
1. Get a handle on your cashflow
Knowing exactly how much money is coming in and how much is going out every month is the cornerstone of any type of budgeting. How can you know where you’re going if you don’t know where you are now?
As a minimum, it makes sense to understand what your living expenses are, how much you’re spending on utilities, where you may be able to make savings and what potential expenses are likely to arise in the short-term.
Knowing this will give you much more control of your finances and will help you to plan appropriately beyond the short-term.
2. Have an emergency fund
No matter how carefully you plan, unexpected expenses can rear their ugly little heads AT ANY TIME.
I’m not talking about that sudden (and possibly unexpected) desire to have the latest iPhone or the urge to splash out on a new LV handbag.
I mean when the washing machine breaks down or the laptop dies and needs to be replaced now – ASAP!
It could also be some form of family emergency that means you need to fork out a wad of cash on an unscheduled flight ticket home.
Or maybe you got fired from your job and have no other form of income.
The standard recommendation in financial planning is to have enough cash the bank to cover your living expenses for between 3 to 6 months.
This is not always feasible for everyone, so if you don’t have that yet, start with a target of $1,000 for your emergency fund and gradually work to build it up over time.
Some money tucked away for emergencies is better than no money to hand at all.
3. Minimise your debt
Most people, in the Western world at least, see debt as a part of modern life.
But the fact is, if you’re always carrying high-interest debt on your credit cards, for example, it’s going to impact on any goals you have of improving your financial status, so get clearing these debts as quickly as possible.
Freeing up the interest you’re paying the credit card company is an easy ‘quick win’ from a savings perspective, but it should be recognised that this can sometimes require you to make some drastic changes to your spending habits, which can be quite difficult for a lot of us.
4. Protect your loved ones
The protection element of financial planning usually involves some form of insurance.
Insurance is not an investment – it’s a way of managing risk. And to many people, it feels like a waste of money if you never have to use it.
To buy or not to buy life insurance is a personal choice and will depend on a few different factors. However, I would suggest that if you have dependents, it should be your responsibility to make sure they are covered in the event of something untoward happening to you.
The need for medical insurance really depends on where you live, your occupation and your general health.
But let’s face it – nobody plans to get sick or injured and the need for medical assistance will almost always come as unexpected, so it is wise to take some precautions.
That could be an emergency fund to cover medical expenses or you might make the decision that taking out medical cover offers you more peace of mind.
5. Clarify your financial goals
Just as it is hard to find your way somewhere if you don’t know where you are now, it is also hard to get somewhere when you don’t know where you’re going.
You may have very specific and easily quantifiable financial goals.
That could be something like, wanting to purchase a house for $500,000 within 2 years.
Equally, you might know that you want to achieve some form of financial freedom or independence at some point in the future, but you’re just not clear on what that looks like or how much is required to get there. Working with a good and experienced financial planner can help you with this.
Some future financial planning requirements can be largely predicted. For example, you know when your child is due to start university and you can find out how much tuition fees cost today, so with that information and a couple of assumptions, you can plan and save accordingly within that timeframe.
Other events that impact your finances may not be so predictable – things like divorce or a death in the family.
Either way, the clearer the vision of where you want to be in the future, financially-speaking, the easier it should be to make a plan to help you get there.
6. Prioritise your financial goals
Goals can be prioritised in terms of timeframe, e.g. is it something in the shorter-term of 1-5 years, more medium term (5 to 10 years), or a longer-term goal of 10 years or beyond?
They can also be prioritised in terms of what you need and what you want. Once you have clarity of what you need and what you want (they’re not always the same thing), you can then prioritise and formulate a plan to get there.
7. Get Some Knowledge
Knowledge is power, or so they say.
Do some of your own research. Read some books, do some Googling and speak to people you know to find out more about investing and what you should expect when meeting a financial adviser. It will help you to prepare the right questions and feel more in control.
Ask friends to refer you to a tried-and-trusted adviser.
Even if you’re using the services of a professional to help you with investments, you should always make an effort to understand the basic concepts of investing, rather than just leaving someone else to do it all for you.
Diving in without a clue as to what you are doing or how your money is being invested is a dangerous game, so get prepped and walk in with your eyes wide open.