Today, 84% of the working population worry about money but only 4% (yes, only 4%) have anything akin to a meaningful Financial Plan to help them.
By meaningful Financial Plan, I mean a considered document that takes account of where you are now and where you want to get to, has some basic assumptions and calculations, and is something you check in on every 12–24 months to see your progression. Aside from what the statistics say, does this sound like something you yourself have in place? If not, then read on.
Having a Financial Plan not only provides peace of mind and takes a lot of the worry about money away, but brings discipline and focus so as to avoid distraction while dealing with life’s ‘little challenges’. You will also save more tax, be much more likely to get where you want to go financially and do it all efficiently. As the Pareto principle says, 20% invested input is responsible for 80% of the results. It’s a ‘work smarter not harder’ principle.
The other side to this that is vitally important is to act now. This is because time is a function of wealth and to make that work, you need to start as soon as possible. What I am talking about here is benefiting from Compound Growth, which can catapult you forwards during the latter part of your investment cycle – Einstein referred to it as the Eighth Wonder of the World.
So what are my top 10 tips? See below for what I deem to be the best ways to get the most from your finances.
1. Take action and schedule the time to do it.
It should take no more than five hours to put together a rough Financial Plan, and then about two hours per year to adjust things along the way. You must schedule this into your diary or it will not happen. Do not become one of the many who end up working very hard but make little real progress financially.
2. Start with the end in mind.
You next need to figure out what your goals are. The key point here is it must be your Financial Plan and therefore needs to be based on your goals. Once you know where you want to get to, you just need to understand where you are now and then simply plot the best route to navigate between the two. Think of it as a satnav to your financial freedom. As a minimum, you should have three sections: dealing with contingencies, planning for any large financial commitments and, finally, financial independence (aka retirement).
3. Be aware of changing legislation and how it affects you.
Legislation changes all the time and keeping up to date with this is vital if you are to keep ahead of the game. This should include tax on remuneration, ISA and pension contribution allowances, pension lifetime allowances and the welfare system (and basic state pension), as well as any impact from a company perspective, if relevant for you.
4. Be prudent with your personal income and conservative with your expenses.
Overpaying debts, particularly mortgages, can be both liberating and save literally tens of thousands of pounds over a lifetime. From a business perspective, the obvious also applies, such as keeping good records, contract reviews, tax investigation insurance, PI, and so on.
5. Update your investment technology.
The way you can invest has transformed over the last decade, but many still use old and out-of-date products and/or policies to invest through. These are often costly, lack transparency in terms of charges and offer limited fund choice. A modern approach, by comparison, should offer whole of market fund selection, have transparent unbundled charges and online access so you can be more involved, monitor performance and attend to the necessary ‘house-keeping’ needed. IPSE’s recent venture with Aegon is a good example of this and is very competitively charged. Find out more on the IPSE website.
6. Plan for contingencies.
Protection is a planning priority and should be at the top of your to-do list. Most should probably have life assurance (a lump sum on death) and if you operate via your own limited company, then generally the best way to set this up is through a Relevant Life policy. IPSE’s recent partnership with Legal & General is very competitive on this basis. More important though is protecting your income in the event of accident, sickness and/or long-term illness and everybody should have this base covered. Again, generally the best way to provide is via your limited company through an Executive Income Protection policy (which pays a monthly income). Neither policy should be deemed a benefit-in-kind if set up correctly and both should be an allowable cost against Profits for Corporation Tax savings (subject to the discretion of your local tax office).
7. Utilise ISA wrappers when able.
For spare post-tax income, ISAs are the first wrapper to fill for long-term investment to build assets for retirement or save for the bigger expenses in life. The ISA rules have changed dramatically of late but, in broad terms, the current limit is £15,240 per tax year, which can be taken out and put back in, and on death passed to a spouse. From April 2016, you will also have a tax-free savings income allowance, so there will no longer be the need to use ISAs for cash holdings.
8. Pensions must be on your agenda.
Pensions are undeniably the most tax-efficient way to save for retirement. To not use them is foolhardy and especially so if you operate via your own limited company as this approach brings added flexibility and planning opportunities. As a rule of thumb, your contributions should be 10% to 15% of turnover and generally are best to be made as an ‘employer’ contribution direct from your limited company. All contributions should be an allowable cost against Profits for Corporation Tax savings. The maximum contribution in any year is £40,000 and known as the Annual Allowance (AA), or 100% of pensionable earnings if making the contribution personally. However, there is scope to make very large contributions by using ‘Carry Forward’, which mops up unused AA from the previous tax years. You should also check your State Pension benefits using a BR19 form (Google it if you are unsure), and if you are caught by automatic enrolment and workplace legislation, then you need to act or will face a fine.
9. Review your existing policies.
Whether it is life assurance, an endowment, ISAs or a pension, review your existing policies to ensure they are set up correctly, delivering value and are in line with your changing needs and circumstances. These plans often get forgotten and are left to drift with diminishing relevance or value.
10. Engage with a trusted professional.
Most do not have the time, interest or enthusiasm to attend to their own financial planning needs properly, even if they have the best intentions. Getting help from a qualified and trusted expert will not only bring expertise, knowledge, peace of mind and ongoing helpful proactive advice, but will ensure you remain disciplined and focused on achieving your goals over the longer term. The beneficial impact of this cannot be emphasised enough and is well worth the relatively small premium it will cost you.
Article by Bruce Nash, Certified Financial Planner at Wealth Matters