Financial Planning Basics – Budget Planning

Ian King, Wednesday October 23, 2013

Previously I have examined in detail the various different elements of a legacy and some of the potential pitfalls of ineffective legacy planning. I now want to move forward and focus on some of the common aspects involved within any successful financial plan.

Budget planning

A vital aspect to any structured financial plan is a thorough analysis of incomes and expenditures. It is imperative to have an idea what all of your incomes and expenditures are -both now and what they are likely to be in the future.

The best place to start is to produce a summary which details your present income, broken down by source – whether this is a salary, pension, investment income etc. Due consideration needs also to be given to how secure this income is, for example income from a rental property could potentially change if a tenant were to vacate.

Alongside your income you need to consider your current expenditures. Here I prefer to use a system which considers expenditures in three distinct sections, core (bills etc. which are likely to continue indefinitely), financial (expenditures relating to a specific financial asset such as a mortgage, insurance premiums etc.) and discretionary (all other expenditures, mainly those which could be forsaken if circumstances dictate).  In my experience this approach can help to provide a more thorough and accurate analysis rather than for example just simply listing one’s direct debit payments.

Frequently people who we first engage with concerning their budget planning often overlook a number of habitual expenditure items but which tend to be incurred on an irregular basis.  Examples here would be the cost of replacing household goods or the depreciation upon a motor vehicle.  Not including such items within your budget planner will commonly for example result in an overestimation of your ability to save or, if you are living off your savings, an underestimation of the regular withdrawal needed from an investment strategy.

The future

You should also prepare for the future by extending your current budget plan to incorporate various ‘what if’ scenarios. This could include how your income and expenditure would change once you have retired or if you became sick or even if you or your spouse/partner were to die.

This would allow you to view what your situation could be if the in such circumstances and therefore allows you to identify any areas that could cause you financial difficulties. If we are able to identify these areas we can then look at what we could do to alleviate any projected shortfalls.

No limitations

It is important to remember a budget plan is not designed to restrict you.  It should also be completed with the knowledge that your plan will constantly change with time, as your situation evolves. The budget plan is just a starting point to look at your current situation, which allows you to build a foundation for financial planning which will eventually develop over time.

Everyone should complete a budget plan regardless of what stage in your life you are at. Completing a budget plan will help you to identify any capacity for savings before retirement and also the need to create an investment income after retirement.

I always complete these budget plans with my own clients not just as a part of the planning process but also to afford my clients the opportunity to visualise situations that they have not necessarily considered before. The process of budget planning itself can indeed be very rewarding.

How to produce a budget summary

There are many different ways in which you can produce a budget plan. We at The Family Legacy SolutionTM would be happy to discuss different techniques and options to produce a budget plan for you. There are also many other ways for you to produce a budget summary yourself, either using a pen and paper or a computerised spread sheet.  The Money Advice Service website also provides a good option. There are also many other websites that have budget planning tools available for you to use.

Budget planning does not have to be complicated and will provide you with confidence and ideas for planning for your own and your family’s future. There are many benefits for you if you are adequately prepared for any possible situation.

As always, if you have any ideas or suggestions, please leave your comments below.

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