On the first day of Christmas, would you like a partridge in a pear tree? Possibly. Five gold rings on the fifth? Where do we sign?! But, if you have children or grandchildren looking to shore up their finances for the future, please pass on our 12 ways (or days) to succeed!
“On the first day of Christmas, my planner ad-vised me…”
It’s a golden rule; spending less than you earn is the key to long-term financial suitability. When you’re starting out in your career, you probably haven’t reached your maximum earning potential. It’s surprisingly easy to spend no matter what you earn, so get into the good habit of budgeting from the outset.
2. Save for a rainy day
You’ve taken control of your spending, now it’s time to build up an emergency fund. The equivalent of three to six months’ worth expenditure is a good rule of thumb, to pay for short-term financial hiccups like being off sick for an extended time or a large unforeseen bill.
3. Compounding is king
The sooner you start saving the better. Compounding basically means you effectively earn interest or investment gains on past interest and gains. Over time, this quickly adds up to make a big difference. For example; if you invested £100 p.m. from age 30, by age 60 (with £36,000 paid in total) after compounding gains, with a 3% return you would have a £58,419 investment. With 5% annual returns it would be an impressive £83,573.
4. Use your ISA allowance
The Individual Savings Accounts (ISA) allowance is currently £20,000 p.a. in 2018/19 and should always be used if possible. You are able to withdraw ISA funds at any time, and there is no Capital Gains Tax to pay on any returns.
5. Plan your borrowing
Debt of some kind is inevitable in life, especially when you purchase property. Nurturing your credit rating is important to ensure you get the best interest rate and terms available. Any short-term debt you have such as credit cards and overdrafts should be paid off as a priority, as they usually attract the highest interest rates. However, using a credit card for usual living expenses and paying off the full balance monthly (therefore attracting no interest or charges) is a good way to build your credit rating.
6. Buy property
You’ve worked on your credit rating with this in mind; purchasing your home. With rent prices as high as they are it can be difficult to save a deposit, but there are still options available to you, including guarantor mortgages and a ‘gift’ from the bank of mum and dad.
7. Get protected
You’ve got some valuable assets now, it’s time to protect them in case the worst happens. Building and contents insurance for your property, but also consider income protection in case you are unable to work for an extended period of time.
8. Make the most of pensions
The sooner you start retirement planning the more comfortable you could be later in life. Remember compounding; it will make a significant difference. It’s also wise to make use of employer contributions if you are employed, it’s essentially free money! Also, consider what you’d like your retirement to look like and how long your savings will need to support you; understanding these key points will enable you to plan appropriately.
9. Plan for big spending
You might want to get married, have children or go on a world tour for your 40th. Big spending needs to be planned for in advance where possible! For the unexpected big spends, tools like cashflow modelling can help you understand the potential impact on your income, expenditure and overall wealth with a graphic representation.
10. Regularly review your plan
Effectively we’ve been building you a financial plan step by step. This is not a static plan, your circumstances, aspirations and other external influences are very likely to change over time. Your financial plan needs to reflect those changes. We’d recommend you review your plan at least annually. A professional financial planner might do this as regularly as every quarter on your behalf.
11. Think about retirement
Retiring isn’t as simple as it used to be, you no longer hang up your tie on your 65th birthday and head towards the golf course when your State Pension used to kick in. The default option used to be purchasing an Annuity. Pension Freedoms now means you can flexibly spend your pension savings however you like after age 55. More people are also working longer to supplement this flexible income, either part-time or in consultancy roles. Therefore, determining exactly when you want to retire can be difficult. Cashflow planning can help you make the ultimate decision, sometimes meaning you can retire sooner than you anticipated.
12. Leaving a legacy
You might feel a little young to be planning for the end of your life and potential Inheritance Tax (IHT) liabilities, but as a minimum, having a valid and up-to-date will is a very wise move. Your assets will be distributed to who you want and it’s a good start for reducing a potential IHT bill. Remember, IHT is a complex, but completely avoidable tax with the right planning.
So, there you have it; twelve (not especially festive but valuable) tips for securing your financial future! There is, of course, professional help available for all these matters. If you’d like to talk to any of our expert financial planners, don’t hesitate to get in touch.
Merry Christmas and have a happy New Year!
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