Following a financial plan and staying disciplined can be challenging.
A good start can be with what someone shouldn’t be doing with their finances.
Not having an Emergency Fund
An emergency fund underpins a solid financial plan. We advise our clients to hold at least six months’ expenditure, plus any planned additional spending, in easy access cash accounts. Not doing this can result in stress when unexpected bills come up or when incomes change. It can also increase the likelihood of having to dip into invested money which, if done
Not having enough insurance
Most people have life insurance which would pay off the mortgage. You should consider whether that is enough. Considerations here are replacing earnings in the event of death or disability and having enough money to cope in the event of a serious illness or injury.
Another issue with insurance such as life insurance which pay out a lump sum is not putting it into trust. If you do not put a life policy in Trust, it will form part of your estate when you die. This could mean your loved ones might pay more inheritance tax than they would have. It can also cause delays in distributing the money.
Not using tax allowances
The Government offers you a variety of legal ways to reduce your tax bill. One is paying as much as possible into pensions and ISAs. Another is maximising the capital gains you generate, without exceeding your allowance which is £12,300 for the current tax year.
Further allowances mean you can generate certain levels of dividends and savings interest without paying tax. Where clients are married, dividing assets between them is an effective way to achieve this.
Ignoring the evidence when investing
The large body of academic evidence tells us that the more you pay for fund managers the less likely they are to perform well. It also tells us that how you allocate assets (equities, bonds etc) has much more impact than picking shares or funds over the long term.
Colossal amounts of money are spent on advertising, which tries to convince us that trying to time the market and pick shares is a good idea. This is despite the fact we know it is more likely to destroy wealth than create it over the long term.
Over the longer term, equity markets deliver the highest returns. The fundamental truth with this is that with greater long-term rewards come greater short-term risks. Worrying more about these risks than not meeting our long-term goals can cause us not to invest enough in equities.
Using Inappropriate Assumptions
It is easy to be optimistic when thinking about the future. This can cause us to believe we will get higher returns than are achievable or underestimate the impact inflation could have.
Most of us live much longer than we would have guessed, which can have a major impact on funding retirement.
Putting Off Estate Planning
Making Wills and Powers of Attorney might not appear to be a priority when you cannot see the immediate need for them. However, the effects of not having them in place when you need them can be huge. It can cause delays and stress for your loved ones as they organise your estate and having no say in what happens to you and your money both while you are living and after you have died.
Wills and Powers of Attorney are not that expensive and can be simple to set up. They are also easy to update, so you can have something okay in place and then perfect on it later.
Many of the mistakes we see in financial planning arise from not sticking to a sensible strategy. The investment side is the simplest example of this where chasing fads or tweaking things based on this morning’s headlines can have a negative impact.
Other things we see are insurance policies being cancelled based on minor changes in income or tax relief being unclaimed.