FOR some, wrestling with financial decisions is a joy. For the vast majority, it is a necessary evil that should be endured in January and then thankfully forgotten for another year.
So, if you remain unconvinced about being a financial hobbyist, then I share an alternative route - a plan for a lasting financial fix. But if you are a “do it once and walk away”- type of person then these steps offer a framework.
Reassuringly, I first published this plan in 2005 and only have one addition to make. Having recently been close to the need for a power of attorney, I add that as step 2.
To repeat, this is NOT advice but an example of a very basic plan. It’s food for thought. If in any doubt, always speak to a financial adviser who can answer your questions and tailor a specific plan for you.
Step 1
Make a will
There are many high-profile examples of individuals who died without a will. Comedian Rik Mayall’s family discovered in 2014 that he had died "intestate" – without a will to protect his £1.2m estate. In such instances, a portion of assets may go straight to children rather than the spouse, triggering a potential tax liability.
For the sake of a couple of hundred pounds, an estate can save thousands. And can make the process less stressful and faster for your loved ones.
Step 2
Set up a lasting power of attorney (LPA)
We don’t like to think about death and wills. We also don’t like to think about the infirmity and illness that often precedes it.
Too often an LPA is only created once families understand the need for it - once a loved one is too ill to make their own financial decisions. The reality in England & Wales is that your husband, wife or children have no legal right to manage your affairs if you can’t.
The government has recently introduced digital LPAs. The process - paper or digital - costs £82 for property and financial LPA and the same for health and care powers.
Step 3
Pay off credit cards and loans
Clear them, then close the accounts. This is the most expensive debt for most of us. Even 0% deals can end up being costly for the unvigilant. They will eventually revert to a high standard rate at the end of the interest-free period, or sooner if you miss a payment. Average credit card rates edged up from 22.5% to 23.9% in 2023, and from 6% to 7.15% for a £10,000 loan, Bank of England data shows.
Step 4
The life insurance question
If you have dependants, you may want to consider taking out term life insurance. As the title suggests, this covers a fixed number of years and the monthly payments remain fixed throughout the term. Some people run it well into retirement but others minimise the cost by covering the length of their mortgage.
Don’t forget to check first whether you have life cover through your work benefits.
Step 5
Maximise your pensions
Make the most of your pension contributions. Your employer may make additional contributions to match yours.
Across your pensions, you can normally pay in a maximum of 100% of your earnings up to £60,000 a year, although this reduces for higher earners - those on more than £260,000 a year.
Step 6
Build a rainy day fund
Our research found that 64%1 of people define ‘financially well’ as having money set aside for an emergency and 48% say this is the most important aspect of financial wellness they want to address.
Your budget should cover contingency savings set aside for any unexpected events, for example a car breakdown or a leaky roof. Start by aiming to have £1,000 saved. Then you can build up to saving the equivalent of one month’s income. Eventually saving ideally three to six month's income to prepare you and your family for the unexpected.
Step 7
Long-term savings
Once you’re comfortable with your rainy day fund and that you have maximised your pension, consider putting excess earnings in tax-efficient savings accounts like an ISA.
It's important that you know the level of risk you are comfortable with when deciding what to invest in.
Step 8
Take financial advice when you need it
If any of this confuses you, or leaves you unsure, you should speak to a financial adviser. It is particularly important as you approach and move into retirement, where planning becomes complex, or to minimise inheritance tax liabilities. You may have a need for advice sooner, such as planning for school or university fees.
Advisers come at a cost, of course. But they can also be particularly helpful for those who struggle to stick to a financial plan. A study2 by research firm Dalbar in the US has repeatedly shown individuals achieving worse returns than the market. The 2022study found that over 30 years an individual achieved an annual return of 7.1% compared to 10.7% for the US market (S&P 500). One of the causes could be individuals falling prey to the behavioural foible of buying after a rally and selling after a slump. An adviser can help investors stick to their financial goals.
Source:
1The Fidelity Global Sentiment Survey, 2022. The data collection, research and analysis was completed in partnership with Opinium, a strategic insight agency. Data collection took place between August 2022 and September 2022 and includes a sample of 1000 UK adults. The sample consisted of respondents with the following qualifying conditions: aged 20-75, either they or their partner were employed full-time or part-time and had a minimum household income of £10,000 annually.
2Dalbar QAIB 2022 Study
