The Need And Benefits of Having A Financial Plan in Place

The Need For A Financial Plan

Successful people live their life by design, not by accident. And so it is with achieving financial independence – a carefully crafted plan comprising goals and timelines, actioned with the support and oversight of a licensed financial planner, is fundamental to achieving financial security.

A financial plan can be thought of as a journey, with a roadmap and a series of guideposts, to a particular destination. The roadmap can be considered as a plan, while the guideposts are periodic reports that measure progress in heading to the planned destination. The destination may be an affordable retirement income or a specific financial goal such as a paying off the family home mortgage, or as is most often the case, both of these critically important financial outcomes.

Like any journey, there will be unexpected delays, stop signs, speed bumps and pot holes. This may require a change in course and modifying one’s driving behaviour or speed level to suit changing road conditions.

Investment returns don’t follow a straight line,  so there will be periods of strong asset growth and high returns, followed by times where growth is subdued and at times, negative.

But staying the course by sticking to the plan ensures a safe arrival at the chosen destination.

A successful plan has these characteristics; clearly documented, subject to periodic reporting and regular performance reviews, a willingness to make changes as circumstances change, and an absolute commitment to adhere to the plan, throughout its timeline.

The Benefits of a Financial Plan

The primary benefit of a financial plan is peace of mind, in that affirmative action, with guidance from an experienced advisor, delivers desired outcomes. Being on the pathway to achieving targeted financial outcomes, builds self-confidence, and creates an inner peace by removing stress. The value of this intangible benefit should never be under-estimated.

But there are tangible benefits too, especially asset accumulation, in the form of an unencumbered family home and a fully funded retirement.

Other tangible benefits are a cash buffer to cover an emergency or sufficient cash to fund lifestyle expenses like holidays and purchase of personal use assets.

A properly structured financial plan should also provide funds for house and car insurance, life insurance, health insurance and ideally, income protection insurance.

Key Features of Financial Plan

 A well-structured financial plan should have these essential elements:

A household budget: A fortnightly (or monthly) cash flow estimate of household income and expenditure is a logical starting point. The budget should cover more than just day to day living expenses like food and fuel. To be useful, the household budget should provide for annual and semi-annual bills like insurance, children’s school fees, car registration, local government rates and holidays. A practical approach to budgeting for such periodic expenses is to put aside necessary funds in an at-call account to cover the expenses when the bills arise. A similar approach should be taken regards replacement of significant personal use assets like a family car.  

Tax-effective solutions: There is limited scope for salaried and wage earners to minimise personal income tax. However, two key points are relevant to everyday householders in terms of tax planning. Firstly, it is useful to remind oneself that the only source of tax-free capital gain in Australia is a principal place of residence. Therefore buying a residence must be a primary goal of every Australian. Secondly, the most tax-effective means for the accumulation of savings in this country is Superannuation. A Registrable Superannuation Entity is a regulated superannuation fund and monies held in a superannuation fund are subject to a generous tax concession. The details are beyond the scope of this note., however in broad terms, superannuation earnings are taxed at a maximum of 15 percent and a retirement pension paid from superannuation is tax-free.

Another tax matter, although minor, is the use of an off-set account for taxpayers with a mortgage. Money held within an off-set account does not earn interest, but instead the balance is off-set against the mortgage debt, reducing the amount of mortgage interest. The reduction in mortgage interest is not a benefit that is taxable, because no assessable income has been derived from the arrangement.

Asset Allocation & Retirement Planning: This is a key benefit of engaging with a financial planner. Different assets carry varying amounts of risk and have different capital growth, income and liquidity profiles. Assets are typically delineated by asset class. The man asset classes are:


Debt instruments such as bonds

Property and some types of infrastructure instruments, such as property trust and infrastructure trust units

Equity instruments such as shares  

Exotic assets like art, gold, vintage cars, rare coins, derivatives and other scarce objects.     

It is when determining the optimal mix of risk, liquidity, income and capital growth that asset allocation becomes extremely important. This is when the advice of a licensed and competent investment advisor is essential.

Cash is considered low risk and highly liquid, while providing no capital growth and negligible income. Bonds, depending on their credit standing, carry different levels of risk and liquidity, although broadly speaking are considered low risk and reasonably liquid, in normal economic circumstances.  

Property and equity instruments vary in liquidity, quality and risk, although generally exhibit capital growth characteristics, and in the case of specific property and infrastructure-backed instruments, a degree of capital stability.

Exotic assets are invariably illiquid, do not produce income and generally do not have price discovery mechanisms to enable reliable valuations to be attributed to them, except for gold.

Depending on one’s age or years from retirement, an appropriate asset mix that takes into account the need for income, capital growth, liquidity and risk appetite, can be determined with the assistance of a financial advisor. It is in this way that financial objectives, as documented in a financial plan, are achieved.

Risk management: Most householders manage household risk through insurance. Physical assets like motor vehicles and the family home and contents should be fully insured. Life insurance is essential (and compulsory) to cover the outstanding mortgage on the family home in the event of death of the family breadwinner.

Private Health Insurance cover is a useful safeguard for those seeking private medical services in the event of ill health. An income-tested tax rebate is available to taxpayers incurring the cost of Private Health Insurance cover.

Income Protection Insurance is tax deductible and covers up to 75 percent of the insured’s average income, up to an agreed amount.    

Estate Planning: Accumulating wealth without planning for how it is to be applied in the event of death, is an often an overlooked issue. A carefully thought-out financial plan will take this matter into account, including how accumulated superannuation benefits are to be applied. This is an important point because superannuation assets do not fall within the ambit of a Will.


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