There is a difference between having a financial plan and having a good financial plan. A good plan has a better chance of achieving the desired results and therefore provides peace of mind, something which is especially important in uncertain situations such as these we find ourselves in today. The question then is – what makes a good financial plan?

It has a strong foundation

Creating a financial plan is like building a house – you start with a strong foundation that will support the rest of the structure. In finance terms, this means you should prioritise certain aspects of your finances.

This is called the hierarchy of financial needs, which consists of the following:

Having an amount of cash on deposit for emergencies, which you feel comfortable with, is the first step towards a good financial plan. It is there to be used in unforeseen events such as medical emergencies; urgent repairs to your house or car; to cover your expenses in the event of a job loss; or to help your family members.

Your individual financial circumstances and goals will guide the next steps in your plan. It is important to make sure that each need is addressed, if required, before moving on to the next need.

For example it is not good financial planning to direct all of your surplus income into a pension when there is not enough financial protection in place to replace lost income in the event of an illness or death.

It is goal-focused

Your financial plan should be goal-focused. These can be anything from repaying your debts and mortgage quicker; to saving for retirement; or reducing your potential inheritance tax liability. Any actions that you put in place should bring you closer to achieving your goals in an affordable and sustainable way.

How you word your goals is important for creating a realistic and useful financial plan. In general, the goals should be SMART:

• Specific (e.g. I want to retire at age 65)
• Measurable (e.g. I want to have an annual income of £30,000 after tax in retirement)
• Action-related (there could be a few different actions you could take to achieve the same goal. Following the above examples, the action could be to increase your pension contributions and/or review the suitability of investments within your pensions)
• Realistic (your chosen course of action should be affordable and not put your other financial needs under stress)
  Time-related (e.g. I want to save £20,000 for a house deposit in 5 years)
• A financial adviser can help you establish your financial goals and prioritise them, taking into account your overall financial situation.

It is flexible

The current COVID-19 crisis has shown that we live in an unpredictable and fast-changing world. Even in a normally functioning world, changes can and do happen – your financial situation may change; you may alter your financial goals; the government will adjust the tax system and legislation;, new investment options will become available.

These changes will likely have an impact on your existing financial plan. To ensure that you are still on track to achieve your goals, your financial plan should be flexible and responsive. This will allow you to reduce the effect of any negative changes and take advantage of any positive ones.

It remains relevant

Creating a good financial plan and putting it in place is only the beginning. It is important to regularly review the plan, your goals and your progress towards achieving them. A financial adviser can help with this part of your financial planning by conducting regular reviews, analysing investment performance and providing recommendations.

Cashflow modelling is one of the most useful tools to help you visualise and achieve your financial future. The assumptions underlying the modelling of your future income and outgoings can be adjusted to illustrate the impact of any actions you are considering. This helps make sure that your financial planning remains relevant.

Antoine de Saint-Exupery said that a goal without a plan is just a wish. When it comes to goals about your financial future, and maybe the future of your family too, a good financial plan with these four characteristics, will help bring that wish closer to reality.

• Read all of our articles relating to COVID-19 here.