By Ben Rogers, Chartered Financial Planner at Equilibrium Asset Management
Many people, including those in their twenties, don't consider financial planning. Ask why and you'll generally hear excuses like 'I don't know enough about finance' or 'I don't have enough money to actually plan with!'.
What most people don't realise is that financial planning isn't about money. It's not about paying into a pension or picking the right investments. These are all just tools.
Financial planning is about considering your future and then utilising these tools to help you navigate it with confidence.
But it's crucial to get to grips with this early. I meet with clients of all ages and backgrounds and I often hear the same thing, 'I wish I'd started sooner'. Whether you have £10 in your account or £10,000, getting a better understanding of what tools are available can help you start planning for your future earlier.
Here, I'm going to talk you through a few of the basic tools for financial planning. It won't give you a headache or anxiety or bombard you with numbers, but hopefully after reading it you'll realise the decisions you make now with your money could end up being the most important.
I'll be honest, investing can get very complicated very fast. The thing is, it doesn't need to be. Investing comes down to a few basics;
- Knowing how much you can afford to invest (or potentially lose)
- Knowing how much risk you can take
- Having enough time to grow your money and recoup your losses, when they occur
And that's it.
Investments should ideally be considered for the long-term, so if your plans mean that you might need it before then (such as for a house deposit or holiday) you probably shouldn't be investing it. All investments can fall as well as rise, so make sure you have an easily accessible 'rainy day' fund in cash for any unexpected expenses that might creep up on you.
You don't need to have piles of cash to start investing. Just start by looking at the money you bring in each month compared with what you're spending. This way, you can start to carve out a portion of your monthly pay to invest for the long term. I'm not saying live like a monk. Your money is there to be enjoyed but contributing just a small amount each month can build up an long term investment pot without you really noticing.
Once you've decided what to invest, take the decision out of your hands! Think of all the direct debits you have coming from your account each month. Do you notice them all? Use the same principle so that your investment becomes habit and you avoid temptation to spend it.
The earlier you invest, the more likely you are to generate greater value because you can afford to take more risk with the potential for a better return on your investment. What's more, although uncomfortable, it doesn't matter as much if a certain investment falls in value in the short term, because there is a longer time for the value to recover. Even if the investment loses all value, you still have 30-40 years of earning to replace it.
You can invest in practically anything – from stocks and shares to gold or Cryptocurrencies – but it's vital to know how much risk you should open yourself to. Steer clear of 'get rich quick schemes' (if anything sounds too good to be true, I'm sorry but it probably is). There is risk with any investment, but the question is, how much are you prepared to take? It's important to carry out research into different kinds of investments, to try and ascertain if an opportunity is just too risky for you. This is something that you may want to seek advice on.
There has been a significant shift by policymakers to take responsibility for retirement away from employers and the Government and put it onto the individual. It might feel odd thinking about retirement when it's decades away but the last thing you want to do is get to your late sixties and realise you haven't planned or set money aside!
Taking advantage of the time ahead of you is critical for retirement planning. Thankfully, pensions make this quite easy. Pensions are essentially a future spending pot, which will be built up over time, however, they have the added benefit of tax relief on the way in. Essentially, the government gives you a bonus to reward your for saving for your future. How much tax relief you receive depends on the income you receive.
Recently, the government made it law that all employers need to provide a pension – called 'auto enrolment'. Provided you meet a few basic requirements, you'll be automatically enrolled in your employer's pension (although you can opt out if you want) and it will be topped up every month by an automatic deduction (from 1% to 5%) of your monthly salary. However, current rules state that businesses only need to offer 2% – going up to 3% after 6 April 2019 – which is unlikely to be enough to live on following retirement!
Some employers will offer to match contributions you make to your pension. For example, if you contribute 5% of your pre-tax salary to your pension, they will match it with another 5%. This is such a valuable opportunity to enhance your pension savings so speaking to your HR department as soon as possible is highly recommended.
Starting to save for retirement early in life is crucial in order to achieve the standard of living you may want for your retirement.
Every person's financial situation is completely different, but as I said, financial planning isn't about money, pensions and investments. It is about you and starting to think about how you want your money to work towards your future could be the best financial decisions you ever make.
The content contained in this blog represents the opinions of Equilibrium Asset Management. The commentary in this blog in no way constitutes a solicitation of investment advice. The information provided is based on our understanding of current rules and regulations, which may change. The impact of any tax changes will depend on individual circumstances. The value of your investments can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.