I often hear the terms financial planning and investments used interchangeably. A common misconception persists that the two terms are the same. In reality, they are two very different things.

Financial planning is the process of creating a road map for the journey through life, which encompasses goals, aspirations and future plans.

An investment strategy, or picking investments, is akin to selecting the correct vehicle to travel on your journey and should take into account variables such as tolerance to investment risk, expected timeframe to achieve goals and prevailing market conditions.

A financial plan is just that, a plan that is created to ensure the correct financial decisions are made, both today and into the future. At its core, this plan defines important milestones that you wish to achieve, such as what age you would like to retire, sending children to an Ivy League university, or the date you intend to move back to your home country.

The ability to earn and save money is assessed, along with the capacity to pay down debts, such as mortgages, credit cards and other loan payments. Budgeting income and expenditure is important, however having a monthly budget alone is not a financial plan.

Tax consequences

As part of the planning process, tax consequences should also be considered relating to both the current country you reside in, or where you may wish to reside. Tax obligations vary from country to country and there is no guarantee that tax planning in one country will be compatible with another. Preparing for an eventual relocation or retirement in a highly taxed jurisdiction may require pre-planning years in advance, which can help to avoid surprise tax bills.

Once you have a comprehensive understanding of your future goals, along with amounts available to earn and save along with anticipated timeframes, you have the basics ready to create a structured financial plan.

A great example of planning is to consider an individual aged 40 wanting to retire at 60 in the UK, who currently has savings of $500,000 and would like to have a retirement income of $50,000 per year.

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