Financial Planning or Financial Management?
There are numerous definitions of financial planning. Most refer to the concept of settng lifestyle goals and then working out a timeframe and the financial cost. For example, you might define financial planning as wishing to be sure you can meet the costs of your childrens's education at university in 12 and 14 years time at a cost of £12,000 per annum each.
This is a reasonable approach but is sometimes rather contrived and in fact designed to allow the use of some computer software to work out a so called plan. Taking the example above, it is not actually very difficult to use an ordinary spreadsheet to work out the inflation adjusted cost of the financial support for the children, take as a base any money already in hand, make assumpsions about potential interest rates or investment returns and the find out how much you should put away from now on to fulfil that "plan". This is then allocated to an investment product or savings strategy - in essence this is a sales driven methodology.
Our long experience tells us that this is not in reality a process that is of much practical use. In fact the more elements you build into an overall plan, the more likely it is that what you actually get by way of available resources and what you need will be a long way apart. The reason is that all such plans are based on a set of assumtions based on current knowledge, both in terms of the financial parameters and the likely lifestyle situations that will have to be dealt with. Referring to our education costs example, what happens if only one of the children wants to go to university, or the parents divorce, or you move to Dubai in 5 years time or there is financial crash in 13 years time?
We are not saying that financial planning is wrong, but that it is rather silly to plan for precise long term objectives. Life is too complicated to do that. We would propose that financial planning is about managing the resources you have now and protecting them as appropriate (remember that one's ability to earn money by working is a huge resource that depends on continuing good health). By managing we mean: getting good returns from your money over the medium term, matched to your tolerance of risk, or the prospect of losing some money; not paying more tax than necessary; having enough liquid capital to meet short term needs and making sure all is working well and above all. checking where you have got to on regular basis.
We think that in the end people want to just know they have enough wealth to do anything they might reasonably want to do, even if they do not know what that is yet! As hardly anybody has enough money to say with certainty that they have every option they might choose nicely covered in financial terms, the trick is to extract the best you can from what you have and re-adjust your priorities as you go along.
Think of your financial resources like a car - you do indeed plan to use the car to do all sorts ogf things, but you don't generally buy and keep a car with a set of half a dozen specific journeys in your head. You maintain a car so that it can take you where you want, when you want. You might plan to drive to the Alps, but the weather is awful, so you go to Spain instead, or maybe defer the holiday altogether. We think you should look after your money in exactly the same way. You might have been planning to fund your daughter's wedding, but then she does the deed in a Registry Office without telling you, so you give her the money as a house deposit instead, or buy yourself a sports car!
In fact, we don't really think planning is the right word - maintenance would be better. Management is perhaps a better word when we are dealing with non physical assets as opposed to a car or gas boiler! So that's why we are called Ethos Financial Management, not Ethos Financial Planning.