Are you taking the right steps to secure your financial success in the future? Raisin, a financial service company, estimated that in the United Kingdom (UK), an individual without children can maintain a comfortable lifestyle on a salary of just over £28,000.
In contrast, a couple raising one child would need a combined income of £55,000–£65,000 to enjoy a high quality of life, including the freedom to enjoy extras such as a yearly getaway.
However, regardless of income, effective financial planning is crucial for setting realistic goals that align with available resources, as highlighted by NGI Finance. By planning finances, individuals can formulate strategies to attain goals, make informed decisions for optimal outcomes, and measure progress to refine future actions.
For a deeper understanding of financial wealth management, continue reading this article to explore practical strategies for building a secure and prosperous financial future.
What is Financial Success?
According to Merriam-Webster, "financial success" is often equated with prosperity, which means achieving success through significant wealth accumulation.
Contrarily, Arcadia Wealth Management, a finance planner, describes financial success as extending beyond the mere accumulation of wealth or ensuring financial stability. For many, it is about creating a sense of well-being and peace of mind by setting goals grounded on what is truly relevant to them.
While financial success means different things to different people, many adopt a more holistic view—valuing personal fulfilment alongside financial achievement.
When to Start Planning Financially
While there is no particular age to begin financial planning, the accountant firm Sovereign CPA Group recommends starting as soon as income is earned, regardless of age or salary level.
However, Investopedia highlights that certain situations may also require developing a financial plan or adjusting an existing one, such as:
- A shift in income that impacts the ability to cover expenses, repay debt, or build savings.
- Health challenges that necessitate reallocating funds away from previously set financial goals.
- Marriage, parenthood, divorce or any other significant life changes that alter financial priorities, obligations, and spending patterns.
- Receiving a financial windfall such as an inheritance or insurance payout – all of which can influence investment strategies and overall financial planning.
- Starting a new job that brings increased earnings, additional expenses, or new financial opportunities.
Nonetheless, prioritising financial planning from the start provides a solid foundation for future stability. It promotes mindful spending and supports long-term economic well-being.
Tips to Prepare Yourself Financially for the Future
Achieving financial security requires planning and well-informed decisions rather than mere luck. Here are key tips to help build a strong financial foundation for long-term success.
1. Set Financial Goals
Financial goals vary widely depending on an individual’s priorities and particular time frame, making it crucial to categorise them into short-term, medium-term, and long-term.
Short-Term Goals
Investopedia highlights that short-term goals are easily achieved within a year yet crucial for long-term success as they help develop the habits and confidence necessary to take on greater challenges.
Examples of such goals include creating a budget, reducing debt, and increasing savings –all of which provide immediate financial benefits.
Medium-Term Goals
A financial technology company, Smart Asset states that the medium-term serves as a critical link between immediate needs and future aspirations.
Typically completed within one to five years, medium-term goals establish a solid financial foundation and reduce financial burdens over time. Objectives such as obtaining life insurance and paying off loans fall under these goals.
Long-Term Goals
First Financial Bank notes that long-term financial goals are objectives established to strengthen financial position over time, prepare for future expenses, or secure alternative sources of income.
Long-term goals typically require five years or more to achieve and often encompass objectives such as saving for a house down payment, funding retirement, and paying off loans.
Nevertheless, it is essential to acknowledge that these goals guide setting priorities and developing plans accordingly. The timeframe for achieving them relies on factors such as income, current financial obligations, and the scale of the goal, all of which determine the type of goal.
2. Map Out Income and Spending
A key aspect of financial planning is comprehending income and spending. By creating a structured framework, individuals can better understand their financial flow and make more informed choices about allocating resources.
Money mapping is a valuable approach as it helps individuals visualise the movement of their finances within the broader financial system. As Financial Footwork explains, this approach uses a flowchart that links income sources to spending categories and savings objectives.
A rising question is: How do you create a money map? Below are the following steps to get started:
- List all sources of income, such as salary, side hustles, or additional earnings, and specify the monthly amount received for each.
- Fixed expenses are non-negotiable costs, such as rent, utilities, insurance, and loan payments. Connect these to income sources and note the amounts.
- Groceries, dining, and transportation are variable expenses since their amounts fluctuate. Include these in the map by connecting them to the appropriate income sources.
- Include savings such as emergency funds and retirement then link to income.
- For individuals repaying debt, it is relevant to include it in the map, specifying how much is allocated to each debt.
The image below demonstrates how money mapping is done.
Once income and expenses have been mapped out, individuals should take a step back to review and make adjustments. Doing so helps assess whether enough is allocated to savings and identify areas where spending can be reduced.
Moreover, spreadsheets or wealth management reporting software can offer a clear overview of their financial breakdown, aiding in more informed decision-making.
3. Build an Emergency Fund
Research from Aldermore’s Annual Savings Tracker reveals that 47% of UK adults lack financial reserves. This is concerning as it means that when major life challenges—such as unemployment, legal issues, bereavement or severe illness—arise, they may struggle to cover unexpected expenses, leaving them financially vulnerable during difficult times.
A leading financial services company, HSBC, highlights the importance of an emergency fund, stating that it serves as an economic buffer against unforeseen expenses. Similarly, global financial services firm Morgan Stanley emphasises that having such a fund prevents individuals from accumulating debt and safeguards savings intended for other financial objectives.
This leads to an important question: How much should an emergency fund be in the UK?
HSBC suggests setting aside an emergency fund covering around six months of living expenses, providing financial security against unexpected costs or income disruptions without requiring withdrawals.
However, for those individuals who are just beginning to build their fund, setting a smaller target—such as three months’ worth of living expenses—can serve as a more achievable starting point before gradually increasing savings.
4. Secure Adequate Insurance
With numerous insurance products tailored for diverse needs, individuals must consider their cases first and determine which coverage aligns with their situation.
An often-posed question is: what types of insurance policies are available? The following are the suggested types of insurance to obtain.
a. Life Insurance
According to Money Helper, an advisory service in the UK, life insurance provides financial security for an individual’s dependants, such as children or a partner, ensuring they are supported in the event of the policyholder’s death.
According to Investopedia, there are two primary types of life insurance. (1) Whole Life Insurance provides lifelong coverage with added cash value on top of death benefits. Contrarily, (2) Term Life Insurance offers coverage for a predetermined period, typically from one to 30 years. If the policyholder passes away within that time frame, a death benefit is paid to the family.
b. Health Insurance
Health insurance, also known as private medical insurance, is a policy that covers the costs of private healthcare, from diagnosis to treatment, according to Bupa, a global healthcare provider.
Under the usual one-year contract, the individual's company commits to covering designated expenses associated with illness, injury, pregnancy, and preventative care.
The following list highlights the common types of health insurance in the UK:
- Basic Health Insurance: provides a cost-effective alternative for those needing private healthcare
- Comprehensive Health Insurance: provides more extensive coverage than the NHS, including inpatient and outpatient care
- Critical Illness Insurance: delivers a lump sum payment if diagnosed with a covered serious illness, like cancer, heart attack, or stroke
- National Health Service (NHS): a publicly funded healthcare system offering free medical services to all legal residents
Setting the Stage for a Wealthy Tomorrow
NatWest revealed that many high-earners in the UK underestimate their financial position. In fact, 27% of individuals earning £100,000 or more per year describe themselves as “not very” or “not at all” wealthy.
Given this, financial planning and analysis becomes crucial, as it helps individuals understand their financial position, make informed decisions, and secure long-term wealth and stability.
By taking proactive measures—such as setting financial goals, outlining income and expenses, building emergency funds, and securing insurance—individuals can create a foundation that provides both short-term protection and long-term advantages.
Financial Management Solution: Frequently Asked Questions
1. How do you determine financial success?
Forbes claims financial success is a personal and subjective concept that varies from one individual to the next. While some may see it as building generational wealth, others might define it as reaching a particular income level, retiring early, or achieving financial freedom. No matter the goal, clarity is essential.
2. How do you plan financial success?
The Department of Financial Protection and Innovation advises making thoughtful choices, investing in personal growth, planning expenditures, saving, adhering to a budget, and investing wisely.
3. How has finance impacted the UK's economy?
In 2023, the financial and insurance services sector contributed £208.2 billion to the UK economy, representing 8.8% of total economic output. It was the fourth-largest industry by economic contribution. The sector was most prominent in London, where it generated half of its total output, as noted by the UK Parliament.
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