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Financial planning – why do you need it?

Posted: 16th September 2019

Did you know that the famous billionaire investor, Warren Buffet, bought his first stock when he was eleven years old? And that he has said that he regrets that he did not start investing earlier. An extreme example I know, but an early start and small changes to how you manage your finances can make a big difference in the long-term.

The problem is that there is always too little time and too much to do. We all have to prioritise and it is easy to neglect some areas of our lives. Unfortunately, financial planning is often one of these areas that gets neglected (alongside reading Marcel Proust’s In Search of Lost Time, but that might just be me).

Financial planning involves thinking about the future and setting medium to long-term goals. This is notoriously difficult to do. Nobel prize-winner, Daniel Kahneman, has shown that most people struggle with such decision-making because it requires a deliberate and consistent effort over time – whereas he found that we are generally very good at making quick decisions that affect our lives in the short-term.

It is just easier and more exciting to book a holiday or replace our old car than to commit to saving regularly for our retirement in ten years, isn’t it? This bias towards the here and now rather than the future is one of the main reasons why the government introduced workplace pension automatic enrolment in recent years. An initiative that has increased the number of eligible employees saving for retirement from 55% in 2012 to 84% in 2017[1].

Here at Mearns & Company, we believe that financial planning is as important as attending your health screening appointments or planning for that big birthday year. We know that the decisions that you make now regarding your finances will have a huge effect on your future.

We also know that financial planning does not need to include complex investment strategies. To illustrate this, I asked my colleagues for their top tips for an effective financial planning strategy- not one of them mentioned derivatives or hedge funds! Here they are:

  • Identify and set financial objectives, and monitor them on an ongoing basis. The objectives may change over time, as will your personal situation, so the financial strategy will need to be adjusted accordingly.
  • Set up a suitable savings plan to bring the objectives closer to realisation.
  • Project the value of your assets in the future using a number of assumptions to identify whether you are on track to achieve the objectives.
  • Take into account changes to tax legislation.
  • Make sure you include all your financial investments. People tend to change jobs more often these days. As a result, they may have a few policies, or pension plans from previous employments, which are easy to lose track of over time.

I hope I’ve managed to convince you that financial planning does not have to be complicated and that it is the one area that you really should not neglect. With that message in mind, I am off to start reading Monsieur Proust again, ten pages a night.

[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/764964/Automatic_Enrolment_Evaluation_Report_2018.pdf

Aurelija Buckute

Paraplanner, Mearns & Company

Business Comment

Business Comment is the Edinburgh Chamber of Commerce’s bi-monthly magazine. It provides insight on Edinburgh’s vibrant business community, with features on the city’s key sectors, interviews with leading figures and news on new business developments in the capital.
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