Financial Planning is not a budgeting service, it’s much more important than that

A common error that people make is to mistake financial planning with budgeting. While it is very important to have control of your finances, budgeting is only one building block in the financial planning process.

What is budgeting?

Budgeting is setting your income and expenditure in any given year. It is very important to set a budget each year and organise your finances. I wrote about how to do this previously.  If your bank account is all over the place and overdrawn on a regular basis, you will find it difficult to plan for the future. By writing out your annual budget, you can begin to plan with a bit of certainty.

Financial Planning is bigger and more important

Financial planning is much bigger than setting a budget. The process starts with getting you to think about what is important to you in life. What is it that you want to achieve*?

Financial planning is not all unicorns and rainbows, setting goals of travelling around the world and spending six months of the year hiking the Himalayas. There are lots of practical and important financial obligations that are important to you that have to be planned for:

1. Children’s education. Parents prioritise their children’s education ahead of anything else. It is a competitive world out there and parents want to give their children the best start in life and will pay what is required to do that. With more and more people doing master degrees (€17,000), there is a lot of expenditure to pay for.
2. Paying down the mortgage early. The biggest debt you will probably ever have is your mortgage. As it has got more difficult to get a mortgage, it is now the norm to get a 30 – 35 year mortgage. But people don’t want to be paying mortgages into their 60’s, they want a plan to pay down their mortgage early. Before they start throwing money against the mortgage, they want to see how many years they can reduce their mortgage by and how that will compare with saving the money or putting it into a pension.
3. Retirement – We are living longer, healthier lives. While retirement may not mean stopping work altogether, people want to have the choice of reducing hours and working because they want to, not because they have to.

Once you have the basics in place, you are able to work on the life changing experiences. You can make decisions about your money that will make a difference to your life…going on those holidays that you thought you couldn’t afford, moving to your dream home, changing career to do what you are really passionate about.

The financial planning process helps you make those financial decisions with certainty. If you spend money now, what effect will it have on your future. Will you run out of money in 15 – 20 years time? How much more money do I need to earn each year to reach my goals? How much money do I need to save? Is it better to save money or pay down my mortgage?

And most important, it will tell you if you have too much money. Are you working too hard when you can be doing things that you really love doing? Can you help out your kids financially without putting your own lifestyle at risk?

What is the most important goal that you want to achieve and when do you want to achieve it by? Drop me an email at steven@bluewaterfp.ie and let me know.

*Spoiler alert – it’s financial independence