What’s important to you?
In Morgan Housel’s international bestseller “The Psychology of Money”, he concluded that the ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.1
When we are asked about what is important to us, our priorities will be driven by our past experiences, our present position, or a mixture of the two. Knowing what matters and why is an important part of planning for your future.
So, when do you want this future to become a reality? Are you looking to retire at 45 and travel the world or are you happy to work till you are 65 so you’re mortgage free and secured enough to help your children in the future? If you don’t have a specific time frame in mind, another approach is to ask yourself, what kind of legacy do you want to leave behind? How do you want to be remembered and by whom?
Time is a powerful force in investing. Whilst it cannot remove risk, in taking a longer-term approach (at least 5-10 years) small amounts have a greater opportunity to grow larger and the big mistakes to eventually fade away. It can be an important anchor when short-term surprises are looking to challenge our resolve and steer us off course.
The action to take will be determined by what you are trying to achieve. There are however some useful concepts and actions that may be helpful to consider as part of that process.
Save early, save more
Even with the best laid plans life can still surprise us. Saving for a particular goal helps us to focus our minds and be more willing to accept the opportunity cost of “missing out”.
Equally, savings that are not set aside for anything specific are an important hedge against life’s inevitability to surprise at the very worst moment.
Many people in the UK don’t have anything to fall back on in a financial emergency and therefore ensuring you have at least six months’ worth of living costs ensures that you have something to fall back on if you have a sudden change of circumstances.
Make your money work for you
Making sure your investments are working in the most tax efficient way is a great way to put your money to work.
The UK government provides several allowances to help. Whether you have an ISA allowance you can use (up to £20,000 per year for the tax year 2021/22) or perhaps a Junior ISA to use to help save for your child’s future (up to £9,000 per year for the tax year 2021/22).
By investing in a stocks and shares ISA, your investments can grow in value tax free if you are smart with your allowances. The same can apply with pensions.
So, whilst there is “no free lunch” why not enjoy a few appetizers? That said, it is important to take financial advice before you embark on any specific tax work, as taxation will depend on your circumstances and the rules are subject to change.
MVP (Most Valuable Player)
In sports, the player awarded this title is one who has shown exemplary performance and contribution to the team. In life, you are the MVP.
When it comes to making plans for your future, it is important to make sure you have the right insurance and protection in place to protect the most valuable people; you, your family or someone important to you. So, whether it’s income protection, life insurance, or simply reviewing your employee benefits, it’s worth making sure you know what you have and identify any gaps.
Behavioural biases
It makes sense to invest in investment stocks or sectors that you have a personal interest in, but it is not necessarily the best way to construct a diversified portfolio.
There’s nothing wrong with having some fun with shares, but it is not the right way to weatherproof your portfolio. It is important to diversify geographically, but also at a sector level too. Multi-asset funds can help diversify risk further beyond traditional asset classes.
Retirement
These should be some of the best years of our lives. Depending on when you decide to retire this can still be a significant chunk of your future.
Whilst it’s all well and good planning your finances for care home fees, what about the time before then? Expenditure is rarely seen in a straight line on a chart – in retirement, that line will often go up before it starts to go down.
Making sure you have a plan for your retirement and what you want to do, will help you put a plan in place for your finances, well in advance of when you might need them.
When to take advice
Deciding when and if to take financial advice can be difficult. But there are some key moments in life when doing so really makes sense: such as getting married or entering a civil partnership, receiving a windfall of money such as inheritance, or when it comes to your retirement.
Throughout all these moments a professional financial planner is well equipped to analyse your situation, help plan your approach, and advise what’s best for you and your family.
Stay flexible
While having a clear financial plan in place is the best way to secure a robust financial future, it’s also important that those financial plans are flexible and that you don’t leave yourself dependent on one outcome.
Diversifying your risk, be that tax or investment, and having a mix of both short and long-term savings can allow you to weather unforeseen challenges and keep your longer-term financial plans on track. Having the proper advice to implement this flexibility to cover unforeseen costs or market downturns can allow you to protect your finances and achieve the lifestyle you want.
Tax rules are subject to change and taxation will vary depending on individual circumstances. This article does not constitute advice or a recommendation; please consult a financial adviser.
1 M Housel, 2020, ‘The Psychology of Money: Timeless lessons on wealth, greed, and happiness’, Harriman House