Why financial planning needs to be designed to support your lifestyle

Many people focus on investing for the highest possible returns – often encouraged by the financial services industry, as it helps them sell more products. However, true financial planning isn’t just about maximising returns – it’s about making sure your money supports your lifestyle.

Start with an Emergency Fund

Textbooks suggest keeping three to six months’ worth of income in an easy-access account for emergencies. However, in reality, the right amount is what makes you feel comfortable while also covering any unexpected costs that insurance doesn’t.

For those still working, I’d suggest at least six months’ salary as a safety net. This ensures you can continue funding your lifestyle should you lose your job, giving you a comfortable window to find new employment without financial stress.

Plan for Short-Term Expenses

Once your emergency fund is in place, think about any larger expenses you might have in the next five years – perhaps a big holiday, home renovations, or buying a new car.

As this money will be needed sooner rather than later, it should be invested with low risk but possibly in accounts with a longer notice period to secure a better return than a standard savings account.

Invest for the Long Term

For money that won’t be needed for many years – such as funding retirement or ticking off bucket list experiences – investments can be directed towards higher potential returns, depending on your personal risk tolerance.

Planning for Major Life Events

You may also have specific financial goals, such as:

  • Funding children’s university fees
  • Helping with a house deposit
  • Paying for a wedding

For these, more detailed planning is needed, considering:

  • The cost today
  • The estimated future cost
  • When the money will be needed
  • The impact of inflation (education costs, for example, often rise faster than general inflation)

Once you have a target amount and an expected investment return, you can calculate how much you need to save to reach your goal.

If you already have a fixed budget for saving, you can instead calculate the returns required – and therefore, the level of risk you may need to take with your investments.

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