In my last few blog posts we’ve focussed on things to avoid, like:
- The promise of ‘Brexit-Proof’ portfolios, based on vague speculation;
- Believing everything you read in financial media, often biased and sensationalist; and
- Chasing the promise of big investment gains, that can turn out to be scams.
Now, I’ve suggested what you shouldn’t be doing, let’s focus on what you should! To help secure your financial future, I believe there are ten simple steps you can follow:
1. Start planning as soon as possible
The earlier in life you start your financial planning, the bigger its potential impact. Compound interest and investment returns, over time, could significantly boost your savings. Compounding means you effectively earn interest on past interest. Naturally, the rate of interest or investment return achieved could make a big difference, but you might be surprised at the impact time can have.
For example, if you start investing £100 p.m. at age 30, compounding monthly, by age 60:
- With a 3% return, you would accumulate £58,419; and
- With a 5% return, you would accumulate £83,573.
By contrast, if you invest the same £100 p.m. but from age 20, compounding monthly, by age 60:
- With a 5% return, you would accumulate a much larger £153,238.
2. Clever budgeting
For long-term financial sustainability, spending less than you earn is essential. Towards the beginning of your career, it’s likely you won’t have reached your peak earning capability. Increasing your income comes with its own challenges and demands, but decreasing your spending could be relatively simple.
- Take control of your expenditure by creating monthly budgets.
- Shop around for better deals, especially when it comes to insurance renewals and home energy bills.
- Use cashback websites, such as Topcashback and Quidco.
- Cancel forgotten subscriptions; research found that we waste over £250 a year on unused subscriptions, with gym membership coming out on top.
3. Build an emergency fund
Now you have control of your budget and appreciate the value of compounding, it’s time to start saving. A rainy day fund should be put to one side to deal with short-term financial emergencies, such as losing your main source of income or a large unexpected bill.
As a general rule of thumb, save the equivalent of three to six months expenditure, in a quick access savings account. Any more than six months expenditure is typically unnecessary and those savings could be put to better use in higher interest or investment return producing arrangements, such as a Stocks and Shares ISA.
4. Structure your debts
Debt has become a social norm, and in some circumstances, can be a good thing. 0% credit, as long as you don’t miss payments and incur charges, is a great way of spreading the cost of bigger purchases if the original sale price isn’t inflated to compensate.
Short-term debt, such as credit cards and overdrafts, typically have the highest interest rates, so you should repay them as a priority. However, using a credit card for usual living expenses and paying off the full balance each month, will:
- Improve your credit rating, which will be helpful in obtaining a mortgage; and
- Offer additional protection on purchases, in the form of a refund if an item is faulty, damaged, never arrives, or the retailer goes out of business.
You also need to weigh up the interest you are paying on debt compared to the potential return you could be receiving on your savings and investments. Naturally, it depends on personal circumstances, but if you have a personal loan with an interest rate of 2.9% and you’re earning 5% after charges on a sum of money that could repay the loan, there is an argument for keeping both.
5. Purchase a home
It’s easy to be caught in the rental trap, making it especially difficult to save a deposit. More people are relying on parental help or specialist mortgages to secure their first home. Options include, but are not limited to:
- Gifts from family;
- Guarantor mortgages;
- Family and joint mortgages; and
- Family offset mortgages.
Some are available as interest-only, or capital and interest repayment arrangements. There are different types of fixed and variable interest rates too, depending on the term, your income, credit score and deposit to name a few. Mortgages are becoming increasingly flexible, but that does mean the options are now more complex.
6. Save for retirement
The sooner you start planning for retirement the better, for exactly the same reasons we’ve already discussed; compound growth. Auto-enrolment has made this easier, with contributions also being made by your employer to top up pension savings. But, when retirement planning, there are four key things to consider:
- When you’d like to retire;
- Your aspirations in retirement;
- The savings required to maintain that lifestyle; and
- Your health and lifespan.
Fully understanding these points from an early age can be challenging, and your aspirations and priorities will change over time. It’s best to review your retirement plan at least annually, or after big life events, like having children.
7. Maximise your tax-free allowances
You’ve started to consider retirement planning; so there are currently tax-free allowances you can take advantage of. In pensions, the most you can save tax-efficiently is limited in two ways, by:
- The Annual Allowance, equivalent to your annual income, up to a maximum of £40,000; and
- The Lifetime Allowance, currently £1.03 million.
Both the Annual and Lifetime Allowances have particular rules which mean on occasion you can exceed these limits, but they are quite complex. If you would like to discuss your pension planning, don’t hesitate to get in touch.
Furthermore, the Individual Savings Accounts (ISAs) allowance is currently £20,000 p.a. and should always be maximised if possible. Unlike pensions where you can’t access the money again until the age of 55, you are able to withdraw ISA funds at any time you wish.
8. Consider big life events
Getting married, having children, the death of a loved one; they can all affect your finances negatively and positively. You can’t always exactly plan for these circumstances, but you can measure their potential effects with cashflow modelling.
This projects your wealth over your lifetime and represents it graphically. It’s a great way of being able to understand your potential retirement income, as well as the effects of big life events taking place.
9. Embrace your retirement
You’ve saved financially, but retiring is no longer as simple, immediate and prescribed as it used to be. You may work part-time, or begin consultancy work to supplement your pension income. There can also be a psychological barrier; making the leap from a secure regular income can be a challenge.
Cashflow forecasting can help make the ultimate decision, but beyond financial considerations, you should take some time to plan all the activities and experiences you’d like to do with your new found freedom.
10. Passing on wealth
You’ll need a valid, up-to-date will to pass your estate to the people in your life you value most. If you haven’t made a will (and according to research, around 60% of people in the UK haven’t), your wealth will be distributed according to intestate rules.
A will also helps you mitigate potential Inheritance Tax (IHT), which is taxed at 40% of your estate over the Nil-Rate Band of £325,000 and Residential Nil-Rate Band of £125,000. There are many IHT exemptions you can take advantage of. Planning can be quite complex, but with enough foresight, it’s sometimes possible to completely mitigate IHT, on your estate value, within current legislation. Please call us to discuss IHT planning if you have not yet considered how this could impact your estate.
Ultimately, engaging a highly qualified, professional financial planner is the best way to help secure your financial future. No matter which step of planning you are currently in, please get in touch to discover how we can help realise and achieve your aspirations for the future.
The value of an investment can go down as well as up. Past performance is not a guide to future performance.
The Financial Conduct Authority dos not regulate taxation and advice
Your home may be repossessed if you do not keep up repayments on your mortgage