As we head into a new season, many of us get the organisation bug and want to ‘declutter’ and improve our lives. Read our latest blog to find out how you can take steps to better your money situation.
There is little point making a return in one area if you are owing more money in another. So, before considering savings and investments, clear up any outstanding debts you owe such as credit card payments and other loans.
It also provides you with a cleaner slate to build your financial plan from, knowing that, outside of day to day expenses, your income can be used strategically for example as an investment or pension contribution.
The only difference here is your mortgage, it is worth speaking to a financial planner here to understand whether you will make a better profit by investing a lump sum than paying off your mortgage and mitigating interest there. This is dependent on the rate of interest you have, the equity in your property, its value and the current market. A good financial planner will have links with trusted mortgage advisers who can also input their advice.
Even if you can only afford to save a small amount each month - it all counts! When invested wisely (more on this later), the compound interest over time will accumulate to more than you may think. And will certainly be more than if you didn’t save. It also builds good practice for the future when you can afford to save more. If you can save substantially, great! Here’s how to structure your savings…
We suggest having 3 pots of money:
Everyday spending - This could be your current account.
Medium-term savings - Essentially, this is emergency cash that you need to set to one side in case your boiler or car breaks, for example. Pop this in a savings account you can easily access. We’d recommend keeping this at around 3-6 months' worth of income, depending on what you feel comfortable with. Unless you expect a loss of income in the near future due to events like taking a sabbatical, career change, or starting a family.
Long-term savings - This is surplus money you can afford to put away after you have topped up your medium-term savings. It’s a pot that you aren’t likely to need access to in the next 3 years. Here, you can afford to put this into an investment platform to benefit from the long-term growth of the stock market. More on markets next!
With your long-term savings pot, investing in the stock market is often a good move. For instance, $1 invested in July 1993 grew by 7.5% per annum by the end of June 2023.*
Review the interest you are currently getting on savings in a bank account to understand if you could get a better return elsewhere.
But, only invest with money you don’t need in the short term as you want to be able to sit tight and ride the wave.
By this, we mean so you can embrace volatility in the market as uplift often comes after downturn. There will never be straight growth, markets are generally up and down but you are looking for a portfolio that, on average, has a positive trajectory.
There are some interesting statistics and graphs here that demonstrate how the market grows overall, despite some dips. Stock gains usually add up after big declines, it is just a case of sticking to your plan and waiting for the uplift. Of course, that is dependent on where you are invested and what in, which is why it is wise to get advice from a trusted financial planner.
If you’re investing for the long term, keep it simple, follow the evidence and invest in a broad, diversified portfolio that offers a global market capitalisation.
Firstly, do you know how many pensions you have? And, could you get your hands on all of them if you needed to? If you’ve worked in various places over the years, or started private pensions of your own accord, you have likely accumulated several pots of money. It may be best to consolidate all of your pensions for ease, and we have explained more on the pros and cons around this here.
Secondly, is your pension invested wisely? Default pension funds that your workplace enters you into with their chosen provider can be a little lacking and, if you have your own private pension, the default fund likely does not take much risk. The provider will probably play it pretty safe for you but you could yield a better return if you change the fund it is invested in.
For instance, global equities have returned on average 12% over the last 100 years, whereas bonds (which many default funds are invested in) returned 7%**. Although global equities are often more volatile and bonds provide a fixed rate of return. Speak to a financial planner to understand the level of risk that is right for you.
We’ve explained more about risk and investment here, where generally taking a bit more risk generates a higher return. But, we must emphasise this isn’t a given.
Cash flow planning (also referred to as forecasting) is a tool used to review what can be achieved with your assets. By projecting your financial position into the future, it enables you to predict upcoming cash needs using several realistic assumptions. The main purpose is to see if you are likely to run out of money and, if so, when.
The value in it is that it enables you to make life-changing decisions like moving home or changing jobs as you can visibly see if they are affordable.
You can find more detail on cash flow planning here.
A good financial planner (adviser) will have cash flow software where they can plot your income, spending, and overall net worth to understand what your finances could look like throughout your lifetime. This is usually in graph form.
We include cash flow plans as part of all of our services.
Insurance (also referred to as protection or cover) allows us to take some control and prepare for events in life that are unprecedented. It is often cheaper and easier to put in place than many people think.
Financial security in the face of events such as illness and loss of income (whether it be via redundancy, change of job or other matters) provides reassurance. Likewise, so does a plan to ensure loved ones and dependents are taken care of in the event of your passing. Talking about unemployment, illness, or death is never pleasant, but they can happen to us at any age.
If you have considerable outgoings such as a mortgage, car payments, and other bills, you will likely want to create a plan should an event occur meaning you are no longer able to afford them.
We’ve written a guide to the types of insurance available and who they are suitable for here.
Perhaps not the most impactful of our tips, but convenient nonetheless! After all, who wants to rifle through piles of paper to find the information they need?
It can be far easier to receive emails that you can file away suitably, making it far easier to locate what you are looking for. Likewise, you can log in to apps or client portals now, depending on the companies you use, to access things like bank and mortgage statements, fund and pension valuations, and insurance policies.
Plus, it’s more eco-friendly to go digital.
If you’re still getting paper statements from financial institutions, why not change your preferences to “paperless” notifications? This includes credit cards, loans, brokerage accounts—even bills.
As for existing paper records, many institutions will allow you to upload important documents into a secure digital vault.
*Wall of Worry chart by Humans Under Management
**Source: Timeline Limited using data from Morningstar.
This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth. The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.
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