Financial Planning Basics – The impact of not producing a budget plan

Ian King, Tuesday November 5, 2013

Following on from my previous blog post, I would now like to investigate the implications of not producing a budget plan.

Examples

Put simply, the failure to undertake a thorough budget analysis is likely to undermine your ability to achieve your goals for the future.  A few of the more obvious examples of the outcomes of failing to effectively budget plan include:

  • Your lifestyle expenditures, without any previous forethought, expand to match an increase in disposable income; dramatically reducing as a result your capacity to save.
  • You under or over estimate how much income you will need in retirement.
  • You may be unaware of the implications of rising mortgage interest costs upon your ability to continue to meet your basic expenditures.
  • A failure to quantify what income you would need if you became unable to work due to ill-health or injury. This could lead to you being either under or even over insured.

Incorrect planning

Not producing a budget plan can have a significant impact upon your future. It can mean that you will not have the funding available in retirement to accomplish everything that you wish for.  It could even lead to you having to work longer than you previously expected.

Example

A forty-five year old male does not have a working budget plan and as a result is currently spending all of his disposable income. He is twenty years away from retirement.  Following a budget planning exercise he now realises that he can afford to cut back his expenditure on non-essential items by £100 per month.

By now saving this £100 per month over the remaining twenty years until retirement he would be able to build up a fund equal to £42,863.10 (with 5% annual compound return) by the time he is sixty-five.  If he now utilised this fund to arrange a Purchased Life Annuity, which provides a guaranteed income for life, this would provide him with a gross income at the outset equal to £2,596.80 per annum.

As a result not only does our hypothetical retiree have an extra £216.40 income per month in retirement he also now realises that he needs £100 less per month in expenditures, an overall combined increase of £316.40 per month in disposable retirement income.

Correct Planning

The above case study highlights the advantages of producing a budget plan when planning for your retirement. Doing so may likely give you greater confidence as to your ability to save and as a result provide you with a lot more opportunities for the future. It also reduces, for example, the possibility of reaching retirement and not being left with any funds available to do everything that you had hoped for.

Importance of planning

It is always better to produce an accurate a plan as possible, with scope for it to change in the future as and when your circumstances change and develop. Further insight as to how to construct a budget plan can be found within my last post.

If you have any thoughts or comments we would love to hear from you below.

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