Focus on what Counts!

With so many pressures on us and information being available on managing your finances from seemingly everyone, including the proverbial ‘man down the pub’, we took some time to identify some of the key areas that could be improved when we are planning our finances. Have a look through and see how many apply to you and then set a simple task of reducing the gap! Good luck!

1. Letting Short-term market movements impact upon your long-term planning – Letting short-term market movements affect your long term plan is letting your emotions rule your logic. Stick to your plan!
2. Letting your emotions rule your logic – Financial Planning relies heavily on using your logic. Our overreactions to situations are very rarely any help. In fact quite the opposite. They can make the problem worse than it already is. As the great American Investor Warren Buffet put it ‘If you cannot control your emotions, you cannot control your money.’
3. Thinking that Pensions are rubbish – Pensions are not investments. They are simply a ‘wrapper’ for money which determines the access terms to the funds and the tax treatment. Claiming that pensions are rubbish or similar, is like blaming the quality of the wine on the shape of the bottle.
4. Thinking that ISAs are rubbish – See ‘Thinking that Pensions are rubbish’. It’s the same thinking.
5. Not making a will – Failure to make a will can leave untold challenges to your intended beneficiaries. Death is not just for old people. Some simple planning and the acceptance that we are not immortal, will help us to knuckle down to planning properly in this area.
6. Not making a lifetime power of attorney – Ditto not making a will, only this time, you could be subject to huge legal fees and long delays if your family needed to apply to the Court of Protection for a Deputyship Order to handle your affairs, financial interests, health and wellbeing.
7. Underestimating the power of compound interest – Whether you are investing or paying off a loan, failure to understand the effect that compound interest has can be catastrophic for your financial health. As Einstein put it ‘Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.’
8. Stop making excuses for having no financial plan – There will always be a reason not to plan your finances properly. Whilst we’re not saying these things are easy, there’s a saying that sums up the fortunes of many – ‘Most people don’t plan to fail, they fail to plan’. Make a start with manageable and easy to accomplish tasks, like balancing your current account for one!
9. Thinking that Financial Planning is about buying the best product – If you were trying to put some shelves up on a wall, would you fuss all week over the best power drill to drill the holes for the rawlplugs, or would you get on and drill the holes. Fussing all the time about whether one product is different or better than another is not the purpose of financial planning. Yes, it’s important to ensure your arrangements are optimised, but financial planning goes further and addresses key questions such as – When will I be debt free? When can I afford to retire? What happens financially to my loved-ones if I don’t make it? Will I run out of money? What’s retirement going to look like for me? Can I attain and maintain financial independence?
10. Not monitoring your Expenditure – As Charles Dickens put it ‘Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.’ If you don’t know what your expenditure is and you don’t monitor it, you won’t know if you are overspending or over economising possibility until it is too late.
11. Investing into something but being unaware of the Risks – This includes cash and property. Many people invest money but don’t see both sides of risk & reward. These are inextricably linked. Just because you can’t see the risks, it doesn’t mean they aren’t there. Take for instance property prices in 2007 (the Housing Bubble) – Property doesn’t continue to go up forever. Many people seemed to forget this and got caught in the wave of euphoria. Property has negative periods too. Another example is putting money in cash because it’s safe. There is no such thing as a safe place to put your money. Icelandic banks offering 16%? Do you remember that one? Why were they offering such a high rate of interest? What people mean by ‘safe’ is that cash is not subject to investment returns and fluctuations – i.e. it can’t go down. However, cash is more than likely going to be subject to the impact of inflation and that is another risk – see 12.
12. Underestimating the Power of Inflation – Inflation is the silent money killer. Ignore it at your peril. £1 today is worth less than £1 last month. If interest rates are high, that usually means the Bank of England have raised them to curb inflation in the economy. The rate of return doesn’t matter. What does matter is the rate of real return which in simple terms is the rate of return after inflation has been deducted.
13. Not realising how long you could live – Due partly to advances in medicine, we are living longer and longer. Not realising this can have catastrophic effects. Dr Aubrey De Grey, a respected scientist, believes that the first person to live to 150 is already alive! What planning have you undertaken for living longer?
14. Thinking that you are Bullet Proof – People become ill, suffer accidents or die unexpectedly. If you don’t make sufficient provision for what might happen, your choice not to do so could have catastrophic consequences on you or those you love. Often, some simple insurance is all that it takes.
15. Saying you are concerned by ‘Risk’ when you really mean ‘Loss’ – Our experience is that people don’t mind risk, it’s loss they don’t like! Make sure you are prepared to accept the potential downsides of any action.
16. Relying totally on State Benefits – State Benefits are the bare minimum you should be relying upon. For example, whilst the state pension is a good start to a retirement income, it is not going to provide for more than the bare essentials. Ditto other state benefits, which whilst welcome, are insufficient in themselves for anyone serious about planning their finances effectively.
17. Not planning for Short, Medium & Long Term goals – Putting all your attention into goals over only one period, will mean you neglect the others. They all matter. Putting more money into your savings account than you need could impact upon how much you have tucked away for later on. Even a squirrel knows that winter is coming and hides their food for later on. Not planning ahead correctly can mean we don’t survive financially, or we have to make tough choices down the line.
18. Buying too Much House – How much house is enough? When it comes to buying a house, bigger is also not necessarily better. Unless you have a large family, choosing a 6,000-square-foot home will only mean more expensive taxes, maintenance and utilities. Do you really want to put such a significant, long-term dent in your monthly budget?
19. My Home is my Pension! – The average house price in the UK is approximately £250,000. Let’s assume you downsize at 65 to a house worth £150,000 and invest the £100,000. Assuming you want to maintain the value of this investment. If this paid 4% per annum to you as income (not guaranteed), this would only provide £4,000 per annum before any tax. Hardly utopia is it? People regularly underestimate how much money they will need during their lifetime. It’s too late when you are retired, because you will find it harder to replace capital when you aren’t working.
20. Retiring too early – People underestimate how long they will live. I met a man who had been retired for 32 years and he only worked until he was 52! People are spending longer and longer in retirement, but retiring early, even by only a few years, could have a significant impact on this period in your life.

To take a positive step in the right direction, please contact us on 01626 833225 to arrange a no obligation appointment to discuss your own circumstances.

Please note that the above article does not constitute financial advice.