What is financial planning?

Financial planning is less about products than about the shape of your finances as a whole. A pension contribution, a mortgage overpayment and a gift to a grandchild all interact with each other and with tax. Planning is the practice of looking at them together rather than one at a time.

The four questions

Where are you now? Income, outgoings, assets, debts, protection in place, pensions accrued. This sounds trivial and is where most people discover something they'd forgotten — an old pension, a policy still costing them monthly, an account nobody's touched in years.

Where are you trying to get to? Retiring at a particular age, a particular income, helping children, leaving something behind. Goals need to be specific enough to test against. "Comfortable" isn't a number; £35,000 a year from 62 is.

What's the gap? The honest arithmetic between the two.

What closes it? Save more, spend less, work longer, take more risk, or accept a different goal. There are only five levers, and every plan is some combination of them.

Cashflow modelling

The main tool of financial planning is a cashflow model: a year-by-year projection of your income, spending, assets and tax, running from now to the end of your life.

Its value isn't the number at the end. It's what it lets you test. Can I retire at 60 instead of 65? What if I need care for four years? What if markets are poor for the first five years I'm drawing? What happens to my partner if I die at 70?

Those questions have answers, and seeing them changes decisions. People routinely discover they can afford to retire earlier than they thought, or that a plan they were confident in fails under a scenario that's entirely plausible.

The assumptions are the model. Growth rate, inflation, how long you live, how spending changes with age. Small changes in assumptions produce large changes in output over thirty years, which is why a projection should be treated as a way of comparing options rather than a prediction.

Any model showing your money lasting exactly to age 94 is telling you about its assumptions, not about your life.

What a plan actually contains

A written plan usually covers:

• Where you are now, in figures
• What you're aiming for, with dates and amounts
• The projection, and what it shows under different scenarios
• Specific recommendations and why
• What could go wrong and what protects against it
• What happens on death, and whether the paperwork reflects your wishes
• When it gets reviewed
• Why it changes

Every plan is wrong within a year. Income changes, markets move, rules change, people change their minds about what they want.

That doesn't make planning pointless — it makes the review the valuable part. A plan is a direction and a set of decisions you've already thought through, not a prediction you're committed to. The people who benefit most are the ones who revisit it, not the ones with the smartest initial document.

Where to start

If you're doing this yourself, start with The order of operations. It's the closest thing to a universal sequence, and it stops the most common expensive mistakes.

This article is for general education only and isn't personal advice.

Related in this topic

• The order of operations
• Do you actually need an adviser?