The start of a new calendar year is often a prompt for you to look ahead to the coming 12 months, maybe with some resolutions thrown in for good measure.
Resolutions are often made to address a specific problem. But when it comes to financial issues or factors that affect your wealth, it’s important to understand whether or not you are solving the right problem.
That’s because solving the problem you first perceive could well actually be more harmful to your finances than doing nothing at all.
It’s important to have an effective problem-solving methodology
One important ability you should look to acquire, as it can really help you manage your finances, is to have a robust problem-solving process.
This can enable you to thoroughly analyse your decisions, ensuring what you’re doing and the solutions you adopt to face problems are aligned with your long-term aims and objectives.
Another key aspect of effective problem analysis and solving is to be confident that the problem you are looking to find a solution for is actually the right one.
I do appreciate that might not sound particularly straightforward. So, to give you an idea of why you need to be addressing the correct problem, here are five scenarios where identifying and solving the right problem can be so important.
1. How you invest your money
Some clients who I am meeting for the first time will have previously tried to invest money themselves, maybe through an online investment platform. They will have tried to time their share purchase and sale using research data, and “expert” analysis – only to end up underperforming the market anyway.
The mistake they and countless investors make is to see the problem in investing as being when to buy and sell. In reality, the problem to solve is actually how best to invest your money in the long term.
If you enjoy investing and have the time to put in the hours researching and analysing, then there’s no reason why you shouldn’t. But my recommendation would be to only do that with money you can afford to lose.
2. Putting the focus on savings rather than investing
A second investment-related problem you may face relates to how you should invest your money, although the actual problem you need to address is how much you’re saving rather than how you invest it.
There’s a mind-boggling array of investment choices when it comes to choosing where and how to invest, and no limit to the number of investment managers and fund houses spending lots of money trying to persuade you to invest with them.
But the real problem isn’t what fund or funds to choose, but how you save, and how much.
I touched on this issue in an article that discussed why the amount you save is more important than investment returns last year. It’s well worth a read if you are confused about this issue.
The two key points I’d highlight from it are that the amount you save will vary as your circumstances change, and that investing as soon as you can and staying invested for as long as possible matters more than continually adjusting your portfolio.
3. Managing your legacy
When it comes to passing your wealth on to your intended beneficiaries, the problem is actually thinking there’s no problem at all and ignoring the whole issue of estate planning.
Inheritance Tax (IHT) can be an emotive issue. While there is a tendency to assume it’s only paid by the very wealthy – and to be fair an Institute for Fiscal Studies report shows that less than 4% of deaths in 2020/21 resulted in an IHT liability – it is a potential problem that you should take seriously.
But even beyond that, by ignoring any kind of estate planning measures – regardless of your wealth – you are ceding control of the allocation of your assets to others.
There are some simple financial planning steps you can take, such as making a will, which can ensure your wealth passes to your chosen beneficiaries.
But by ignoring the problem, you’re leaving things to the laws of intestacy to decide.
4. Knowing how much wealth you need
Clearly, wealth accumulation is a positive trait. Making money, either through working or investing, maintains your lifestyle and means you can live comfortably, look after your loved ones, and enjoy yourself.
However, it’s easy for issues to arise if you see the problem as being what you have to do to make money rather than considering how much you actually need.
I touched on this issue in an article last year that asked what “wealthy” actually means and how it can affect your retirement planning.
Single-minded wealth accumulation can lead to frustration as you could end up in a situation where you are never happy, constantly measuring your wealth against unattainable targets.
It’s often much better (and potentially less stressful) to take a step back and consider what you actually need to be happy. For example, happiness can be measured in terms of protecting your loved ones, securing your future, and knowing you have enough to secure a comfortable lifestyle once you stop working, rather than the value of your assets.
5. Focusing on your own career and knowledge
The final problem is not a financial planning issue as such but does relate strongly to your long-term wealth and financial security.
In fact, what I’m suggesting is that when it comes to your future wealth, worrying about how to invest and the amount you set aside can be the wrong problem to address, as you can potentially gain greater benefit from focusing more on your earnings potential.
After all, you can religiously set aside a certain percentage of your earnings each month, and ensure you have the right investment strategy in place to maximise your returns.
But the real engine that drives your current and future wealth is your earnings.
Get in touch
If you’d like to talk through your own investment strategy, then please get in touch.
You can call me on 07769 156 250.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The Financial Conduct Authority does not regulate Taxation & Trust advice and Will Writing.
Equity investments do not afford the same capital security as deposit accounts.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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