I hope like me you had a very enjoyable festive period and new year with friends and family.
How are those resolutions coming along? I’m not big on these myself but generally find this period ideal for getting some important matters in order before the year starts to run away with itself.
This week it’s my finances…
Time, or lack of it, is one of the main reasons many of us aren’t as organised as we’d like to be and I’m no different. In fact some of my financial loose-ends aren’t too dissimilar from those I advise clients on all too regularly (oh, the shame!).
My to-do list is near the end of the article but first are some financial planning resolutions you might want to consider in the new year:
1. Let it Go
If you owned a property that made less money and was more costly to run than everyone else in the area, the chances are you’d probably sell and invest elsewhere.
It’s a shame this logic isn’t better applied when it comes to investment and pension funds. I encounter many people who choose to remain invested in products with poor performance and high charges. Over a period of time, this can cost even a moderately-sized fund thousands (even tens of thousands) of pounds – it’s giving money away.
But why do people put up with this? Daniel Kahneman, one of the forefathers of Behavioural Economics, suggests that at a primal level, we’re programmed to avoid physical or emotional pain at all costs. Making a poor financial decision is one such scenario that could result in pain (or loss).
Faced with this prospect, we can experience a mental shutdown of sorts, which then causes us to over-emphasise the value the things we own i.e. we place a greater trust in a product that’s ours simply because we own it, even if it’s inferior to the alternatives.
Add to this the fact that financial products themselves can be confusing and a general lack of context (i.e. how a product performs in comparison to the rest of the market), it’s easy to appreciate why attachment and inertia develop.
This doesn’t make it right though – consider taking independent advice on your investments and pensions and be prepared to make changes if it’s to your obvious advantage.
2. The Burning Hole
How often have you looked at that balance on your savings account and thought, “that money needs to work a bit harder”?
I know some people who’ve been asking that very question for years and still haven’t got round to doing anything about it! Having a nice sum of money in the bank earning a meagre interest isn’t by any means the end of the world but it will steadily lose it’s buying power (real value) over time.
The main reasons for delaying investment decisions are often emotional ones (avoidance of potential loss, for example) dressed up as the rational:
“I’m waiting for the market to fall and I’ll invest when it hits the bottom”.
“I’ve always kept it there just in case I want to buy property”.
“It’s for emergencies.”
(Understandable when you’re talking about £25,000 but what type of emergency requires £250,000!)
If you have an investment term of at least 5 years, don’t hang about waiting for something that might never happen. Be purposeful, take the plunge and then review your plan on a regular basis.
3. Don’t leave it too late
Inheritance Tax is a major concern for the majority of my clients but there’s a general reluctance to tackle this issue head-on.
There are reasons for this, not least that it requires careful planning, but the simple fact is like anything in life, the later you leave it, the fewer the options you’ll have at your disposal.
The major obstacle tends to be client expectations – many hope or expect there to be a silver bullet they can fire at the tax problem or that it will simply go away.
The reality is that significant Inheritance Tax reduction involves a series of solutions employed over the course of many years. So don’t delay, start today!
Here’s a few of my own financial resolutions, some of which may strike a chord with you:
4. Keeping a Roof
If either myself or my wife were to become seriously ill or worse, I need to ensure we have provisions in place to protect our lifestyle and future plans.
First on this list is our mortgage. We have a modest life and critical illness policy in place but need to increase this to ensure the outstanding mortgage balance could be repaid in full if something happens to either of us. This would free us from a major financial commitment and help retain our lifestyle and future plans.
5. Bills, bills, bills
Much to my wife’s chagrin, I still insist on lacing up my football boots and running around a muddy pitch like an over-excited 12 year old every Saturday afternoon. I may be pushing 40 but my amateur league career shows no signs of slowing – like most things however this comes at a price.
The frequency of aches, pains and injuries I’ve suffered has steadily increased in recent years, as have my physiotherapy bills. On a similar note, I now consider my dentist a close personal friend due to the amount of time I’ve spent in his surgery over the last 2 years – by far my most expensive friend!
We are now in the process of putting some private medical insurance in place to help ease our health and dental bills, which are only likely to increase in future.
6. Future Focus
I invest my own capital using the same strategies and portfolios I employ for many of my clients. Nothing will change in this respect but my immediate goal is to simply put more away, particularly for retirement.
Property investment should serve us well in the long-term, but this is a very costly asset and isn’t very tax efficient. My aim is to therefore boost the value of other tax efficient, low-cost investments e.g. pensions, ISAs, etc. Some strong fund performance should help but investing more money in the pot will make the biggest difference in the long-run.
7. Where there’s a Will
I, along with two-thirds of the adult nation, don’t have a will so my estate would be dealt with under intestacy laws in the event of death.
Administering and settling an intestate estate isn’t fun and can be extremely time-consuming. Besides this, my wife and I want to leave specific legacies to other people and we also need trust clauses inserted to help further protect the estate.
Writing a will is still the most effective way of making your wishes very clear and reducing the work for those carrying them out.
Whatever your plans, aspirations and resolutions are for the new year and beyond, please get in touch if you feel there’s any way I can help you on your journey.
Thanks for reading.