The fine balance of financial freedom
Planning your financial future is a tricky balancing act. Gemma Siddle, Chartered Financial Planner at Eldon Financial Planning Ltd, is here with some more New Year tips on how to give equal weight to your needs now and your goals later on.
You have probably heard many times that the first step to financial freedom is budgeting. What does that mean? It means understanding how best to live for today, while at the same time providing for the future. It sounds simple, but in reality it can be very complex – because of course, everyone’s circumstances are unique. Everything from plans to starting positions will vary greatly from person to person, and what is a luxury for some may be considered a ‘must have’ for others. That’s why financial planning must be tailored to you.
However, the essence of any financial plan is balance. It’s about balancing three core elements against one another: Essentials, The Future, and Living for Today.
Achieving a financial balance
First you have Essentials. These can be broken down into just four or five categories: mortgage or rent, household bills, transport and groceries. A target spend here might be around half of your income, though for parents it’s likely to be significantly more, with additions such as the basic cost element of childcare.
Once you have budgeted for essentials, you can turn your attention to The Future. This is about building a strong financial foundation for yourself in years to come, particularly when your ability or willingness to earn is reduced. Planning for the future include paying off loans and credit card debt, accumulating rainy day savings, and (most importantly) pension contributions. These should come after you pay for your essentials, but crucially before you do any other spending. Expect to use about 20 per cent of your income in this part of the budget.
Lastly, we have Living for Today. This is everything after the above two elements are taken care of, and involves a lot more personal choice. This is the spending that will include holidays, family entertainment, hobbies, pets, shopping and other miscellaneous expenses. Typically you might spend 30 per cent of your income on living for today.
The result is your financial seesaw: a finely balanced arrangement of current expenses, future planning and living for today. And it is a tricky balancing act, because the arrangement isn’t static; your expenses may fluctuate, your future plans may change, and your income itself may vary.
New Year is a good time to look at your own financial seesaw and consider how well it’s balanced, and whether this balance could be improved. It’s worth remembering that when belts get tightened, the one element that most often gets neglected is the pension contribution. Essentials can’t be pared back and we want to keep on living for today – so unfortunately it’s our future selves who usually take the hit. But we can’t keep on doing this forever, and eventually the imbalance in our financial plan may cause it to topple over, just when we need it to be most stable.
This is where a professional financial planner can be most helpful. They can work with you to map out your financial life in full detail and make plans accordingly – so that even when your circumstances change, you are able to keep everything in balance.
If you want to make this the year you stabilise your own financial plan, contact an independent financial adviser today.
Gemma Siddle is a Certified and Chartered Financial Planner at Eldon Financial Planning Ltd.