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Financial Guides Five Personal Finance Tips
1. Understand where you are today You should comprehensively review your existing financial position, giving particular attention to understanding your net incomings (salary, pension, dividend etc after tax), your total outgoings, your assets and your liabilities. Net incomings may come from a variety of sources including salary, pension(s), rental income and unearned income that may be generated from a variety of sources. Clearly listing these is essential to smoothly manage your personal financial affairs. Perhaps more important is to plot your monthly and annual expenditure. These should be specifically listed so that you have a clear understanding of where your hard earned money is going. Having this figure is absolutely essential as it dictates your needs in many areas of personal finance such as how much life assurance you require, retirement, investment and retirement planning. To help you with this we have created a comprehensive expenditure spreadsheet able free for existing client’s or £15.00 for others. To request a copy go to our enquiry section. The next step is to analyse your assets. This could be your home, your investment property, your investment portfolio, your pension or your savings account from example. Once you have a headline summary of your assets, you should try to work out what the tax treatment of each is. Are they tax-efficient based on your current income tax position? It is very easy to increase returns without increasing risk, just by making your investments more tax-efficient. Few people do this very diligently though. Finally, list your liabilities and make a note of what interest rates you are paying on each. If you don't know what the interest rate is, and most people don't, find out as a priority. While we believe there is a balance to be found between building-up liquid assets, the repayment of debt as soon as possible should be the first priority without falling into the trap of being ‘property rich and cash poor’. We recommend Flexible mortgages for this purpose.
2. Understand where you want to go tomorrow Good plans shape good decisions therefore once you understand your objectives the next step is to create a financial roadmap in the form of a written document designed to help steer you towards achieving your objectives. This of course should be reviewed on a regular basis to account for inevitable changes in circumstances. “There are those who travel and those who are going somewhere. They are different, and yet they are the same. Merely asking yourself powerful and sometimes difficult questions and jotting down some notes and answers will enable you to think laterally and concentrate on the bigger picture in order to help you focus on – and achieve – your financial and lifestyle goals. Ultimately what you should strive for is a written breakdown of your goals, with a timescale and cost and begin the process of working toward achieving these as soon as possible.
3. Make the most of financial opportunities
You should attempt to maximise the returns on your investments within your risk parameters through appropriate professional advice. This will involve establishing a strategy that is likely to incorporate a dynamic asset allocation and the selection of quality funds that consistently deliver above average returns (easier said than done). An extra 1% on a portfolio can make a tremendous difference. A £100,000 investment achieving a 5% return over 25 years would be worth £338,635, an astonishing £90,821 less than a portfolio earning a 6% net return over the same period that would be worth £429,186.
It is vitally important that you maximise the tax efficient opportunities that are available to you. Pensions, Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) offer tax relief at source and all plans allow growth within a tax efficient environment. Utilising these vehicles will help to enhance your net investment returns and the potential for you to achieve your objectives. However, these plans are likely to involve investment risk and are not always suitable. Professional advice should be taken prior to purchasing one of these investments.
Most people don't choose a Standard Variable Rate (SVR) mortgage; it's the rate your lender switches you to when your initial offer period expires. With many 2 and 3 year fixed rate mortgage deals coming to an end, homeowners should be very careful not to get stuck on their lender’s SVR. The Bank of England Base rate was 4.5% in December 2005. It is now 5% (as at mid April 2008). SVRs are usually 1% to 2% higher than this. You could therefore easily see a rise from 4.5% to 7% on your mortgage interest rate. On a £200,000 interest only mortgage, this would represent an extra £416.66 per month of interest. Whilst borrowers will have to accept an increase in mortgage costs, taking no action and accepting the SVR will not lead to a comfortable 2008. If you find that you are currently paying your lender’s SVR, it's never too late to remortgage to a cheaper deal but make sure that you check the terms and conditions of your existing mortgage first.
Many employers offer their staff a range of benefits as well as salary and bonus. You should check what is on offer to you (ask your HR department) and make sure that you are taking advantage of these. Typical benefits might include: Life assurance – this is often 4 x salary. Remember that if you leave the firm, you will lose the insurance (and you might be in poor health at the time) so where you want to make sure that your family is well provided for in the event of death, it often makes sense to have some insurance outside of your employer scheme. Pension – this could be a final salary scheme or a “money purchase” scheme such as a stakeholder pension. Your firm could well have an appointed pensions adviser to help you with decisions on this. Income Protection (also known as Permanent Health Insurance) - big employers often give you up to 75% of salary (minus state sickness benefits) in the event of long-term illness. You may also be covered on full salary for 6 months. This is usually only on basic salary, not bonus and is taxable so it might not be enough to protect you and your family. Increasing numbers of employers are now offering flexible benefits packages through which you can buy extra holiday, childcare vouchers, extra life insurance, home computers, critical illness cover, medical insurance for the family etc. Such schemes are fantastic because many of the benefits you buy are tax deductible, i.e. the cost comes off your pre-tax salary.
Offering employees share option schemes is an increasingly popular way of giving workers a stake in the companies they work for. In the past 10 years, an estimated £100bn of shares have been transferred to employees with companies recognising the benefits of giving employees an incentive to work harder for the good of the business. Many large firms will offer SAYE or “Sharesave” schemes. These allow employees to save between £5 and £250 per month for 3, 5 or 7 years. Employees get a tax-free bonus if they complete the savings plan. Employers grant employees an option at outset. At the end of the period, employees choose either to use the money saved, plus the bonus and interest, to buy shares (if buying the shares would generate a profit) or have their contributions returned plus interest (if this would give the higher return). SAYE schemes offer huge upside potential with very minimal risk. Essential, if the share price falls during the period, you will still get your savings back plus a tax-free bonus so the only “risk” is the fact that you could have received a slightly higher return through a conventional savings account. Other employee share schemes can involve giving free shares to employees, granting options to buy shares at a set price after a specified period of time, or allowing employees to buy shares, and matching these with free ones.
Without the appropriate level of protection against death, critical illness or long term incapacity your financial position and security may be very vulnerable. Therefore, to guard against this, sufficient provision should be in place to ensure that should an unfortunate event occur, there is a ‘safety net’ in place to protect against this and allow for financial normality to continue. Similarly, as you go through life accumulating assets and paying tax as we do so, it is a crying shame that on our deaths we pay additional death taxes and thereby reduce the amount our loved ones will inherit. It is never too early to begin taking steps to ensure that our chosen beneficiaries inherit as much as possible without been decimated by taxation.
5. Review your position regularly and do not neglect your personal financial affairs One of the biggest pitfalls I see in wealth management is just lack of attention. People are very busy. Sometimes personal finance takes a backseat to other more pressing matters. But it you take that approach, you may wind up feeling that the years have flown by and you haven’t much progress. Successful wealth creation takes a commitment of time and you must take time out at least once a year to sit down with a financial planner to review the past year and progress that you have made in working towards your objectives.
The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the U.K. THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. You should seek independent financial advice on investment vehicles which may be used to repay a mortgage debt.
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