Transcript
Martin Upton
Financial planning is a process. It goes through different stages. In this course you look at one way of describing this staged financial process. It is a 'model' or, to put it another way, a simplification designed to help clarify a more complex process.
Stage 1 - Assess the situation
This involves clarifying and prioritising goals, working out constraints and resources, finding out relevant information and perhaps seeking out well-informed advice.
Stage 2 - Decide on a financial plan
This entails working out possible actions to take or changes to make, such as deciding on which type of financial product or service might be required to achieve a particular goal, or setting a budget to adjust income and/or expenditure.
Stage 3 - Act on the financial plan
This means acting on what has been decided: for example, making the planned changes to income and/or expenditure; shopping around and selecting which financial product is the best buy, given needs and constraints (such as a specific savings account or a specific insurance policy).
Stage 4 - Review the plan
This involves regularly reviewing the outcome of the action and taking into account recent changes or events - is your financial plan still the best option? Does further advice need to be sought?
Perhaps moving into a new cycle of financial planning is necessary.
The financial planning model shows each stage in the planning process and how each one - assessing, deciding, acting, reviewing - leads into the next stage. Planning is a continuous process over time, with one complete sequence through the four stages leading naturally into another such sequence. This demonstrates that financial planning is not a one-off matter but an ongoing process over time. Financial plans need to respond and think ahead to the different stages in a person's life course, and also to take into account possible future events.
You've seen how goals need to be clarified and prioritised: this is part of Stage 1. You've also seen, in Stage 2, how deciding on a financial plan aims to fulfil the goals, given the constraints.
Stage 3 entails acting on the financial plan; there's little point in devising brilliant financial plans if they're not actually acted upon! This stage might involve shopping around for best buys of specific financial products.
Stage 4 is the important one of reviewing the outcome and checking progress in the light of changing circumstances. This, in turn, may lead to another round of financial planning.
There may well be some to-ing and fro-ing between the stages. Financial plans are worked out on the basis of existing goals, but some goals may have to be revised in view of the financial plans that they turn out to require. Someone might have a goal of climbing Everest, but then they learn that the financial plan required to do it is too demanding, and so the goal is revised. Alternatively, perhaps, a financial plan has to be revised when more information is acquired about the actual financial products available. In reality, the lines dividing the separate stages of the financial planning process may be blurred. But not withstanding this, these stages of the four golden rules of effective personal financial management.