Why financial planning should be as much about “now” as it is about “tomorrow”

A few months ago, I wrote about how budgeting was the cornerstone of financial planning – in essence, that you need to ensure you don’t spend more than you earn, and to put plenty aside so you can enjoy the life you want to in the future.

It’s sometimes easy to get caught up in the need to save, save, save. You may think that you should be putting aside as much as you can now to ensure you have “enough” when you retire.

But what about today?

As the last few months have shown us, we can’t all be completely sure what tomorrow will bring, and not everyone can be sure of a long, healthy life in retirement. And, even if we do, wouldn’t it be nice to also enjoy our life while we’re working?

To do this, it’s vital that you balance the need to save for later with enjoying and living your best life now.

Short-term issues should always be tackled first

If you’re behind on your rent or mortgage, or your car is on its last legs, having no money to fix the problem because you’ve channelled it all into your pension might not be the perfect approach.

Planning for the long term is important but does have one exception: Don’t let it stop you addressing your short-term obligations and expenses.

Ask yourself: how long can I put off this spending without there being negative consequences? If it’s not long, you should tackle that issue first as it’s a more immediate need.

Make sure it’s a “need”, though. Don’t forsake the benefits of long-term saving just because you want something now.

Careful budgeting can help

A good way to balance your current needs and saving for the future is to budget carefully.

There are three useful approaches to budgeting here. Perhaps the simplest is the “50/30/20” budget, where you allocate:

• 50% of your after-tax income to “needs” including food, housing, utilities and insurance. These are the payments that impact your quality of life.
• 30% of your after-tax income to “wants”. This isn’t just holidays and meals out; this is your streaming TV subscription, your mobile phone, and your non-essential clothes purchases.
• 20% of your after-tax income to savings and debt repayments. This is the money you pay to your credit card each month, your pension contributions, and any savings.

Planning your income and outgoings, and taking control of your budget, can help you to balance your current and future needs.

Consider your long-term goals and start to plan

Once you’ve dealt with your immediate financial needs and taken control of your budget, you can start to make plans for the future.

It’s worth remembering that “tomorrow” doesn’t just mean saving for your retirement. It could mean:

• Paying off your mortgage early
• Helping your children onto the property ladder
• Buying a second or holiday home.

As the “50/30/20” budget suggests, you may also need to strike a balance between saving for the future and debt repayment. If you have debts at high interest rates, it can make sense to repay those first as the interest you’re paying may be higher than any returns you’d generate – particularly on cash savings.

Conversely, you might have a mortgage at a very low interest rate and want to use your spare cash to generate returns over the long term. The tax relief on your pension contributions, plus the potential compound returns over many years, might be a more attractive option.

A balancing act

When I help clients to build a financial plan, it’s always a careful balancing act. Dealing with immediate obligations is important but focusing on the long term often generates better results in the end.

And, of course, things change. There might be years where you don’t earn as much, so can’t save as much. That’s fine! It doesn’t mean you have ruined your plan. Perhaps you can make it up in the future when your job or income changes? Maybe you can cut your spending now?

Regular reviews, and adapting your plan to the prevailing circumstances, is key.

A final thought

Sometimes my clients become concerned that they aren’t saving “enough”. At the extreme level there are those who like the FIRE approach (“Financial Independence, Retire Early”). These people live a very frugal life now and save aggressively, in the hope they can retire much earlier.

While this has its merits, it does mean you lack the balance of “living a good life now”.

Saving something is far better than saving nothing, even if you can’t presently hit your target of saving 20% of your income each year (or whatever it is).

Could you live without some nice “wants” for now? Of course you could. It may even bring you a little closer to reaching your future savings goals. But would you have enjoyed fun days out with your family or friends? Travelled and seen amazing places? Eaten great food?

When you combine enjoying today and planning for tomorrow, you end up with a financial plan that offers the best of both worlds.

To find out more about how I can help you to balance your current and future financial needs, please give me a call on 07769 156 250.

Please note

If you repay your mortgage early, you may have to pay an early repayment charge to your existing lender.

 

Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.