Your finances: In need of a vaccine?
We are used to seeking advice to maintain our other 'pillars of well-being': the GP refers us to a specialist if our knees are bad, a counsellor helps us unpick and move on, we may look to a spiritual leader to restore balance. But why do so few people proactively seek a financial coach?
Probably with good reasons, after all it’s not so long ago that the financial services sector was referred to as a ‘Wild West’, ‘Wolf of Wall Street’ domain characterised by opacity and charging structures that penalised clients and kept them in the dark. The Retail Distribution Review (known as RDR and enforced since 2013) has done a great deal to improve things here, but the old adage remains valid - ‘if it sounds too good to be true, it probably is’. Some people have done well taking a ‘DIY’ approach to managing their finances – that’s all well and good, but sooner or later you’ll likely need a specialist. If you have decided to look for advice, seek a reputable firm that holds Chartered status.
The 2020 psychological milestone
As the calendar year closes and starts afresh, we will likely lament on what could have been (so much for ‘2020 Vision’!) and look forward to the psychological milestone, closure and promise that the New Year represents. When the fireworks fizzed, and Big Ben bonged, you may well have offered certain farewell gestures or utterances at the departing ‘Year of Covid’. However it may have affected you - for the pain has not been felt evenly across this land – and whether you see yourself as a survivor, a loser or even a winner in relative terms, I would urge you not to chalk off 2020 too readily.
Why? Because there is much we can, and should, learn from this particular annus horribilis.
Certainly, from a financial planning point of view, there have been some timely reminders and lessons learned (or re-learned).
‘Like most of the great turning points in history, it was obvious and yet no one saw it coming.’
- Mark Bowden
To begin with, let us not forget that the truly ‘exceptional’ or ‘unprecedented’ Covid-19 event was in fact entirely anticipated and, also, long overdue. The World’s epidemiologists (along with my biology-teaching wife) are not actually doom-mongers; they called it right! Market downturns, similarly, are part of an economic cycle and the signs were there – the ‘longest bull run in history’ had to stop some time. And what a sell-off it was, the steepest yet, with the virus and our reaction to it delivering disruption and threat to a World too connected and free to shut it down. There is light at the end of the tunnel and global markets have staged impressive recoveries, having responded well to recent good news on vaccines and US presidents - even the UK’s FTSE is creeping out from under its Brexit cloud. The road ahead still looks long and bumpy, however, with recessions and rotations either underway or hotly tipped for 2021. Make no mistake, the repercussions of 2020 will be felt for generations.
But not by everybody. Why? Because some people Follow The Rules - with the way they manage their finances - and some don’t. Those who can maintain discipline during the calmer days tend to fare better when the storm comes. Not only this, people who are on top of their finances tend to see things improve in other aspects of their lives too – benefits that can outweigh their financial gains, in fact! It’s no coincidence that financial health is seen as one of the four pillars of well-being (along with physical, mental and spiritual well-being, of course).
So what are The Rules?
First off, you need to Keep Cash – also known as an Emergency Fund, Rainy Day Fund or (my favourite) a Dippy Pot. This money provides you with a bit of security and is there for your own unforeseen challenges: loss of employment, a big garage bill, ‘that’ phone call from your friend/relative/offspring. How much is enough? As a rule of thumb, you should look to have three times your monthly expenditure in available funds on deposit but there is no upper limit – sometimes people need a bit more if they are to get off to sleep at night. Others prefer to rely on credit or loans for emergencies, such as credit cards or The Bank of Mum & Dad, but these lifelines can cost more or tend to dry up when you need them most (2020 has definitely reminded us of this!). Having your own funds is better for your confidence and well-being.
Another advantage of keeping cash, of course, is that you are poised, ready to swoop when there is a downturn and stocks are available at a discount.
But it can be hard to build up your savings; we are not too good at delaying our gratification. At worst, we spend money we haven’t got on things we neither want or need to impress people we don’t know or even like. Similar to starting a diet, it is hard to drop bad habits and start good ones – we have a tendency to operate in the short term, but there are plenty of tricks to help you get started on the earn it, keep it, grow it path:
- Learn the difference between your needs and wants – a good starting point is to check your bank statement each month and challenge each entry. Did you really need to buy x and are you actually getting good value from subscription y?
- Budget – spend only what you’ve got and only on what you need.
- Save (or invest) the rest.
- Or, better still, set up a standing order that directs some of your wages to a separate savings/investment account every pay day. You can then spend what’s left, guilt-free.
- Give your savings pots names – eg. Emergency Fund, Holiday, Christmas - you’re more likely to respect and add to them.
So, savings are important but cash is not always King. Interest rates are at historic lows so it is very important to watch inflation. Inflation is the insidious increase in the cost of living that will erode the purchasing power of your savings – what you have in the bank now will likely buy you less this time next year. If you want your cash to last longer, it needs to start working harder for you so you should expose it to the magic of compound interest (more on this later).
2,000 new 65th birthdays - a day
Inflation can also catch out pensioners. Every single day, 2,000 UK citizens celebrate their 65th birthdays and the Queen sends 250 telegrams to new centenarians. Increasingly, we are planning for what could well be ‘100 year lifetimes’. Clients tend to underestimate their life expectancy, or even laugh at the idea of living to a real ripe old age, but what happens if you do? Not all pensions are designed to keep pace with inflation so it’s important to review your retirement planning regularly so that you may stay on track for the retirement you want.
Protection is another word for insurance and is very much the ‘cornerstone’ (or, to use a fitness analogy, the ‘core’ strength) of sound financial planning. Normally, it is impossible to build up sufficient reserves to cover you for the least desirable outcomes that life can throw at us, but this doesn’t mean you should ignore them, it is always better to prepare for the worst and then hope for the best. Insurance lets you do this because your risk is underwritten and shared. This year, we have all been reminded of our mortality and, clearly, in the event of you ‘being squashed’ (dying), no amount of protection is ever ‘enough’. But if the people you love stand to lose out on your passing, what better way is there to show them you care? Additionally, a life-changing event (being ‘nearly squashed’ or diagnosed with something horrible) is more likely to happen and can drive a horse and cart through your life goals. You can also protect your income so that your bills can continue to be paid in the event of you into being unable to work. In short, you can protect most things but, whilst it’s important to plan for what could happen ‘tomorrow’, this shouldn’t wipe out your standard of living ‘today’.
And if you do decide to replace any cover, only cancel the old policy when the new one has gone live.
At this point, it is probably only reasonable (if predictable) to point out the need to Take Advice. Whilst even the smallest of steps can make a big difference to your outcomes, it is fair to say that financial planning can quickly become complicated and time-consuming. And there are pitfalls. Good advisers don’t work for free but know exactly which questions to ask and listen very carefully to the answers. There is evidence to suggest that you generally get what you pay for, and then some, with advice leading to retirees enjoying significantly larger pension pots and investment holders seeing up to 2% extra growth each year in real terms. On top of this, there are non-quantifiable benefits and value in having your own financial coach, someone who will join you on your journey, is available to review your finances regularly, can help you to stick to the rules and, yes, sometimes, save you from yourself!
Your financial health coach
We are used to seeking advice to maintain our other pillars of well-being: the GP refers us to a specialist if our knees are bad, a counsellor helps us unpick and move on, we look to a spiritual guide to restore faith or balance. But why do so few people proactively seek a financial coach? Probably with good reasons – it’s not so long ago that the financial services sector was referred to as a ‘Wild West’, ‘Wolf of Wall Street’ domain characterised by opacity and charging structures that penalised clients and kept them in the dark. The Retail Distribution Review (known as RDR and enforced since 2013) has done a great deal to improve things here but the old adage remains valid - ‘if it sounds too good to be true, it probably is’. Some people have done well taking a ‘DIY’ approach to managing their finances – that’s all well and good but sooner or later you’ll likely need a specialist. If you have decided to look for advice, seek a reputable firm that holds Chartered status.
... having rules is all well and good. Following them can be hard. Good advice can keep your finances on track.
See Part 2 - Forecasting financial health