In an ideal world we would all be able to afford to engage a Chartered and Certified Financial Planner to help us identify what is really important in life, both monetarily and spiritually. In reality many people at the start of their personal journeys or on more average incomes cannot afford to do so. I therefore thought it would be useful to distil my learning into a Ten Point Financial Guide To Secure The Life You Desire (snappy I know!) to help you manage your personal planning more effectively.
- Spend less than you earn. It sounds obvious but it’s amazing how many people really do believe there is a money tree out there or, worse still, that the ‘state’ will come to their rescue. Face reality; it’s down to us.
- Draw up a budget – and stick to it. This does not need to be overly fancy or complex, a note book or spreadsheet will do. There are also some great free apps that can help you with this discipline. A budget will help you identify what and where you are currently spending money and where you are able to save to meet your short, medium and longer-term goals. Of course, life is for living and it’s OK to treat yourself from time to time but don’t forget the opportunity cost of spending money now rather than sticking to your plan. It may feel like you somehow deserve that impulse purchase but budget for your treats as well as your savings.
- Protect who you care about – starting with you. What happens if you die? Or cannot work due to ill health? Who would suffer? We all think that ‘it’ will never happen to us but bad stuff happens so prepare for it, just in case. Income protection is important for single people who have no-one else to pay the bills if they cannot work due to ill health. Income protection and life assurance is important to those with partners and children if they are the breadwinner, are at home looking after the children (the cost of which is often overlooked) or have a mortgage.
- Build your ‘cushion’ (or disaster fund). This is the cash that you know is there in the event of an unforeseen event…losing your job, the car dying a death, the roof blowing off; you get the gist. There is no magic number for this cushion but a good rule of thumb is 3-6 months net salary. This should be held in an instant access cash account.
- If your employer has a pension scheme – join it. 99% of the time this means that you are going to get ‘free’ money. Think of it as additional salary albeit you cannot get your hands on it until you are 55. If you have not already been Auto Enrolled you will be by 2018. This is a government initiative that has set minimum levels for you and your employer to pay to a workplace pension scheme. Simplistically, by 2018 you will be required to pay 4% of your ‘pensionable pay’ and your employer 3%. With tax relief this amounts to 8%. A great start. Top tip- do not opt out! See number 7 below about the magic of compound interest. A great website to review for further details is the The Pensions Advisory Service (TPAS).
- Savings strategy. Once you have your ‘cushion’ in place, joined your employers pension fund the next thing to do is start to build a savings strategy for the short, medium and long term. We like to call it your ‘3 Pots’:
- The Short Term Pot is money you will need in the next 1-2 years
- The Medium Term Pot is money you may need in say 3-5 years and the
- Long Term Pot is money for 5 to 10 years plus, typically for when you wish to reduce or stop working.
The short term pot should be limited to cash as you do not wish to risk a fall in the value of your money just when you need it. You should consider notice accounts or 1 to 2 year term deposits.
The medium term pot should be cash ‘like’. That is, longer term cash deposits or very high quality short dated investment bonds. You would generally expect to get a higher return in these savings types because you are either locking the money away for longer (in the case of term deposits) or exposing the capital invested in bonds to the risk of moving down as well as up particularly over short terms.
The long term pot is where you should accept some investment risk by investing into low cost, broadly diversified funds made up of company shares (equities) and bonds (money lent to companies and governments). The aim is to make sure that your long term savings provide a return over inflation. You should expect investments into these types of funds to go up and down in value hence the reason why we are calling them ‘long’ term.
- Start now. Don’t delay. Procrastination really is a thief not just of time but YOUR money. By way of example if you start to save £500 a month at age 30 (perhaps a combination of your and your employer’s pension contributions) which increases each year with inflation (at say 3%) and achieves an average return of say 6.5% a year (see note 1 below) by age 65 you will have amassed a fund of about £1.1million. If you delay to age 40 your potential fund is reduced to about £485,000. A staggering difference of about £600,000!
- Increase your returns by using tax efficient ‘wrappers’. A tax efficient wrapper can enhance your returns by saving you income tax or capital gains tax or sometimes both. Tax ‘wrappers’ include pensions (see point 5 above) and also include NISAs. The ‘wrappers’ do not change your underlying investment choice which can be cash, bonds or shares but they will save you tax and hence improve returns. You have an annual NISA allowance of £20,000 in 2017/18, try to use at least part of it even if to hold your cash ‘cushion’ (see point 4 above).
- Write a will. I know that when you are starting out it may not feel like you have much in the way of wealth but if you die intestate (a fancy word meaning dying with no will) your estate will automatically pass according to the Rules of Intestacy. The rules favour spouses/civil partners and your children which may be fine if you are married or in a civil partnership. However for single people, or unmarried couples possessions will pass to your parents or if they are not alive brothers and sisters. Is that what you really want? A simple and inexpensive will allows you to decide who you want to leave your worldly goods to.
- Get this guide out of the drawer and review it regularly. Guides and plans are only of value if you regularly review them. Dust this down at least every six months just to check that you are sticking to these (admittedly) unexciting but proven tips to get you in good shape to achieve the future that you desire.
I hope this short note helps. Good luck”.
PS We asked Ruth what the least Boring thing she has ever done is. She told us about a tandem parachute jump, resigning from a job to set up her own business (“to provide advice to people and not sell products!”), running the marathon twice (RESPECT!), doing the London Triathlon which involves swimming in the Thames at Docklands and doing a surfing course in North Devon. Exhausting stuff.
Ruth is the co-owner and Managing Director of The Red House. She is one of the highest qualified financial planners in the UK holding Chartered and Certified Financial Planning (CFPcm) accreditation as well as being a Fellow of the Personal Finance Society (FPFS). She is a regular speaker at various financial planning and business development events.In response to a belief that there was a better way of providing financial planning services Ruth and her business partner set up The Red House Consulting Ltd in 2007.The Red House is a boutique Chartered and Accredited financial planning firm providing a full financial planning and investment service to its small number of wealthy client families. Ruth lives in North London and spends her free time living a ‘very fortunate life’ surrounded by friends and family with an emphasis on fine wine and laughter.
(1) This return is based on an investment 80% into a Global tracker fund indexed to the MSCI World and 20% Citi World Government Bond Index hedged to sterling after making an allowance for fund costs.
Other notes and risk warnings
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
The Financial Conduct Authority does not regulate Wills
Errors and omissions excepted.
Content correct as of June 2017.
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