Personal Financial Analysis

Before you get serious about stepping into the financial investment markets, it is essential to sit yourself down and fill in your own life jigsaw.

Doing an extensive financial planning analysis will give you a clear picture about where you stand now and where you want to go to in the future.

It is best to complete a form that asks all the pertinent questions. Employment details with your earnings is the starting point before you can make decisions about how to spread your earnings to cover your current living costs, before tuning in to your other concerns for the years ahead.

Then it is a question of ticking the boxes on whether your cash savings need to be angled at children’s education, property ownership, or liabilities like car loans and insurance and mortgage payments, and finally your plans for your lifestyle for travelling the world when you retire.

Needless to say plans need to include flexibility as an ingredient, because, inevitably, circumstances will change and financial plans will alter accordingly.

Insurance is always a minefield for making decisions. You need to decide whether you need life insurance to cover your family, critical illness cover in case of a serious unexpected illness, with income replacement cover enabling you to maintain your lifestyle until things return to normal, and, of course, medical insurance to cover the unknown as time and age takes its toll.

All these decisions take into account risk, and herein also lies a major foundation stone in deciding on which road to take. Everyone has their own attitude to risk, and this outlook is essential when choosing your own investment choices. There are low risk, medium risk and high risk investment choices. The underlying factor is ‘time’ itself, since it is a practical approach to take more risk if you have more time on your hands.

It is understood that equity markets go up and down like the tides, but predicting when these events will take place is the unknown factor. It is accepted that the longer the time involved, the better most stable equity holdings will perform overall. Timing is the mystery, which is unpredictable. Once in a blue moon one might get the timing right and make high profit in a short period, and then you can look at changing your plans to suit your new found wealth.

In the short term, fixed interest and annual dividend payouts could be the low risk path, but the rates of inflation must be taken into account. In the current climate in 2016 the bank interest rates are chronically low, and inflation rates almost certainly mean that your cash deposits will be worth less at the end of a year’s holding. Funds with a guaranteed return at rates higher than inflation can often fair better in such a climate.

In the medium term the choices become greater and choosing mutual funds, or investment trust funds or unit trust funds are common routes. These routes give your hard earned cash to fund managers who manage the money on a constant on-going basis, and keep their eyes glued on the ball constantly. Most of them have instant access, so buying and selling can be done swiftly either on a daily, weekly or monthly basis. Others have lock-in periods, which must be kept to, otherwise early withdrawal can be expensive, and some structures have back-end charges if one comes out early for up to 8 years. The reason for these ‘lock-in’ or ‘back-end’ charging structures are to pay the introducing brokers their fees upfront, so they are keen to guide investors into these types of resources. Having said that, there are many cases when the investor is looking to stay invested for a minimum of 10 years anyway, so these charges are irrelevant. However, if circumstances change, as they often do, then this route can be costly. Think carefully prior to action.

It always makes sense to have a stash of cash as ‘rainy day’ money, in case of a sudden need. Such a cash buffer is a protective security fund just in case.

Once all these issues are clear, it is time to open the box and choose how much to put away as a lump sum and, often chosen, an amount to put aside on an on-going basis by way of a savings plan. The regular savings plan route is a sensible, obvious and practical route for people with a regular salary payment.

This personal financial planning will set the foundation stones in place before action is taken.

The personal financial planning will also need to consider greater issues that will definitively affect the investment decisions. These will include taxation issues for different nationalities and countries of residence, the need to name beneficiaries on applications or through overall trust documentation, and other very personal circumstances that will impinge on investment decisions.

The financial planning analysis will sweep away many cobwebs and clear the board before laying down a complete and feasible jigsaw of understanding, prior to taking that leap into the world of financial investment.