The characteristics of a flexible financial plan

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Balanced between different time periods

The plan should look at income and expenditure in the short, medium and long term and there should be a good balance between these periods. In the case study we have been given. Ron and Elizabeth could achieve the right balance by drawing up;

  • Detailed weekly and monthyl cash-flow forecasts
  • A less defined budget for a relevant period, say three months
  • An outline budget for the whole year

It would be good if they had a plan for the future which encompasses their medium and long term financial goals. Such as a plan to pay off the kitchen extension as fast as possible. They could take action to have an insurance policy that covers their mortgage payments in case of illness. 

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Informed

Like any other plan, a dynamic financial plan should be based on accurate information as far as possible. For example, someone aiming to make a purchase financed by a loan (or in our case a mortgage) should be fully aware of

  • Exatly how much the monthly repayment must be (£650)
  • The day of the month when the money is taken out of the account
  • The fees or penalty charges if there is a missed payment or the loan is repayed early.

Similarly, planned spending should be based on up to date knowledge of the comparative prices of the goods or services that someone is gonig to buy. 

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Able to adapt to changing products or services

Many versions of budgets and cash flow forecastes may be made to reflect changes in a products features, terms and conditions. Ron and Liz should look at how changes to the rate of their mortage will affect their finances. We know that they like to live an extravegant lifestyle so how might a rise in interest rates affect this? Can they afford a rise or at least change their expenditure to cover the rise? Is it possible for Liz to work extra if needs be? These are sometimes called "what if?" calculations.

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Fluid

A dynamic financial plan must reflect any monthly, termly or seasonal variations in the personal circumstances of the person making it. For example, students may have greater income at certain times of year, such as during the summer holidays if they get a tempory Job, so they can plan to spend more or save more. Expense are likely to be higher at certain times of year for some people. For example during the summer or festive periods. A flexible financial plan should take into account these variations of income and expenditure.

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Realistic

The person drawing up the plan should aim to have a balance between pessimism and optimism. This is where many people go wrong when drawing up their financial plans. It is very easy to make predictions about the future based on best case scenarios. Most people will assume that their job is safe and that they will countinue to work the same hours. They assume that the rates of tax will remain and that they will take-home the same income for the foreseable future. They may underestimate how much they spend on clothes, food and going out. 

It is clear that very big purchases can lead to very significant problems. Buying a house or a car, or even booking a holiday without working out exactly how much it will cost and how you re going to pay for it are major causes of financial problems and may lead to going into unplanned debt. Even small items of expenditure need to be taken into account if they are regular and frequent. It might be a good idea to keep a diary where you make note of every expenditure no matter how small it is. This will reveal that people spend much more than they realise on fast-food and sweets. Me-irl

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