I am often asked such questions as:
- “how much do people normally spend?”
- “how much do people normally give away?”
- “what should we allow for……..?”
These are actually impossible questions to answer in most situations, as everyone will be different. There is no ‘wrong’ or ‘right’ when it comes to expenditure. It is your lifestyle. Everyone is different, with different expenses. The important thing is that you get to your own figure and make this as accurate as you can for you.
One further quick tip here on cutting unnecessary expenses. We all know that we should regularly change utility providers, check our car and house insurance quotes every year, have annual travel insurance rather than arrange it each time via the travel agent, but how many of us really do this?
Look after the pennies
Individually the savings may not appear to be much, perhaps a £100 per annum here and there. But add up all the savings that can be achieved over a year and the figure can suddenly become very significant indeed. Take these savings and add in the power of compounding and you may be very surprised at the results.
Typical costs that should be looked at regularly with a view to making savings include:
- House contents and buildings insurance
- Car Insurance
- Annual Holiday Insurance
- Mobile Phone contracts
- Satellite TV contracts
- Internet service provider contracts
- Gas and electricity supplies
- Banking charges
- Credit card facilities and interest charges
- Old legacy memberships, policies or contracts which are no longer needed
Review your current financial products
This will also be the time to review your current financial products to make sure they are still fit for purpose. This is something that you may require some outside help with, depending on the type, nature and complexity of the existing arrangements you may have and how you purchased them in the first place.
Such products may have been purchased in stages over many years and rarely would the arrangements have been put in place as part of a much larger, comprehensive financial plan. People sometimes accumulate financial products much the same way as they would say a pair of shoes or new clothes: they are needed at the time, look attractive at the outset, but may soon get discarded at the back of the wardrobe in favour of the bright new shiny pair, or the latest fashion ensemble.
Now is the time to get everything out of the wardrobe, check if it still fits, and discard the rest to the charity shop!
I am not suggesting for one minute that you throw away all of your existing financial arrangements just because you have had them for several years. Some old-style financial products provide very valuable benefits indeed, and some may contain conditions or tax breaks that are simply not available anymore. It will, therefore, be a case of systematically working through what you have, why you got it in the first place and is it still fit for purpose. You should then check to see if there is now something better / more appropriate to have in place.
From a financial planning perspective, protection should always be the very first thing to look at. Protect what you already have before you look to create and build more wealth. The greatest pension plan in the world is of no use if you don’t make it to retirement, or everything falls apart at age 50 because of a long-term illness or premature unexpected death. Protection is top of the list.
Typically most people in the UK are drastically underinsured when it comes to things like life assurance. They may have some form of mortgage protection in place, perhaps some death in service benefits with an employer, a pension or two and some investments. But if it came to it and the key breadwinner or asset holder in the household passed away, would those left behind really have enough to maintain their lifestyle? The answer for most people is a resounding no.
It is worth us defining at this stage the difference between Savings and Investment. Savings is to do with the regular setting aside of monies for a specific purpose or perhaps just a rainy day. The key word here is ‘regular’. For example, putting £250 per month into a cash ISA would be classed as savings. Investment, on the other hand, is dealing with the initial allocation of and ongoing management of larger lump sums of money. For example, a £500,000 inheritance would clearly be an investment. Over time building savings can, of course, lead to you holding and needing to deal with an investment portfolio. There is no clear definition of when savings become investment, especially when you consider that once an investment is established, it can be added to regularly. For our purposes, think of investment as lump sums of money and savings as regular allocations.
In some ways investments are one of the easier aspects to deal with. You will have some or you will not and they will either be in the right environment or not.
Investment management can be a DIY activity. Some really enjoy playing the markets, reading the financial press, and making individual buy and sell decisions. To do this properly, however, is a very time-consuming activity. If you enjoy it and have the time then great. If not then this again is something that you may wish to delegate to an expert.
Pensions are a huge subject all of their own. The number and variety of pension arrangements that you can have in place can be very significant indeed. Each may have a different set of underlying rules associated with it depending on when it was set up or when you joined the scheme.
This is a very specialist area. If you are in any doubt at all over the type of pension you may have, what benefits may be available to you, or the rules associated with it, then this is clearly an area where I recommend advice be sought.
For financial planning purposes it is important to see pensions as part of the overall assets available to you. Similarly, pension income is just one form of income that can be provided. In Cash Flow terms it is your total cash requirement in any given period that matters. “Income” can be made up from a variety of sources, a pension being just one of them.
It is important, particularly in retirement, to see “income” in terms of Cash Flow (money in and money out) rather than as you would, say, a fixed monthly salary payment. Cash inflows can be made up of planned capital withdrawals as well as fixed or variable pension payments.
Why review your financial products?
Reviewing your financial products regularly means that you are making sure that your products do what they intend to do. And if you make changes, your expenditure will typically be affected – either positively or negatively.
Either way, this is an important exercise that is a core part of your financial planning. Completing it will give you a true picture of the resources you have available.
Where do I start?
If I asked you right now what do you want from your life, what would your immediate answer be? A sports car? To travel the world? To retire or, perhaps, to leave a legacy?
All of us have things that we would like to achieve in our lives. It could be two, five or ten years down the line. Perhaps we may want to leave a legacy of some kind. To realise these dreams, we need to be both focused and financially organised. This is the essence of True Lifestyle Financial Planning.
It’s with this lesson in mind that I set out to write my book, Live Life With Purpose: A Guide to Getting a Life Plan and Sticking With It. This book will help you take the steps to live life with purpose. It will help you gain clarity. It will show you how to implement the six steps needed to create a sound Life and Financial Plan so you can ultimately achieve your goals.
We’re offering free copies of Live Life With Purpose to anybody who feels they would benefit from it. Simply go to this page, tell us where to send it, and we’ll pop a copy in the post for you.
I hope you enjoy reading the book and putting into practice some or all of the lessons it contains. Even if just one idea sparks you into taking some action, then I have achieved what I set out to do.