Many of us are thinking about planning our short term finances around family holidays or even getting some work done on the house. But how can we make the most of our long term financial resources? What are the key things to think about when financial planning?
When we are managing busy lives, juggling childcare responsibilities and holding down a 9-5 job (if not working even longer hours), it can be easy to put off financial planning. After all, getting started is half the battle. Our financial advisor, Anna Gratwick, shares some of her top tips on prioritising and managing your finances to protect you and your family’s future.
Make financial planning a two-party conversation
At this stage in your life, you probably have a spouse or significant other. It is important to make sure that they are involved in and aware of the family finances.
We recommend making financial decisions as a team, especially when it involves planning for your family’s future as this makes it a joint responsibility and helps keep you both on track.
For many of us, money can be a sensitive topic and it can lead to difficult conversations. However, not talking about it can leave your partner unprepared should something happen to you.
Manage debts & mortgage payments for a brighter financial future
Once you have some cash savings to cover essential and unexpected expenditure, you should think about how to best pay off and manage any existing debts and mortgage payments. Start by taking stock and writing down everything you owe. Look at your credit card balance, car and personal loan repayments, and, of course, your mortgage.
Most debts carry high-interest rates; for instance, credit cards have an average annual percentage rate (APR) of 23.1% to 22.9%. Some credit cards, like credit builders, can have an APR as high as 36.3%.
High-interest rates are expensive and can quickly spiral out of control. Therefore, we always recommend that you pay off any existing debts, especially those with interest rates, as soon as possible. Keep an eye on introductory low interest rates and be sure to pay off the balance or switch to a different contract before the introductory offer expires.
Whilst it is important to have an emergency cash ‘pot’, try to strike a balance between the amount you have in your savings account and the amount of interest you pay on your mortgage or existing loans. At the moment, interest rates are low for savers and high for borrowers. As such, it may be best to direct payments towards outstanding debt rather than holding large sums in accounts that earn very little interest.
Safeguard your family with protection policies
Once you are on top of your debt repayments, it is time to plan for a rainy day. What would happen if you were diagnosed with a terminal illness? Could your family cope without your income in the short or longer term? I’m sure none of us would like to leave our partner in the lurch or worrying about family finances should the unthinkable happen.
Protection policies should give you some peace of mind as they are designed to provide financial support to your family should you become unable to work, suffer a critical illness or pass away. They are available with different levels of cover, for different terms and premiums can vary widely depending on your own circumstances and level of cover required.
Protection policies can include critical illness cover, income protection or life assurance and you are likely to require a combination of all three to ensure you are covered in all scenarios. However, the level of cover and term of the policies is very much dependant on your own circumstances. You should consider factors such as the age and financial dependency of your children, family income and expenditures, and any plans for the future such as university costs. Some policies require you to undergo a medical exam and you will need to declare any pre-existing conditions or family illnesses.
A balance should be struck between affordability and your level of cover. Many people rule out putting these policies in place due to feeling it will be too expensive. However, putting in place a level of cover which is affordable to you, although it may not be completely comprehensive, is far better than to have nothing in place at all.
A financial advisor can help you put the right policies in place to make sure you and your family have an appropriate level of cover in place. We also recommend that you review your policies following any major life changes or at least every five years.
Planning for your retirement
Retirement and pension planning continues to hit the headlines and it is important to think about how your income will be provided in retirement.
Pensions not only help you to build a fund for retirement but are also one of the most tax efficient ways to save and invest. You receive income tax relief on pension contributions at your highest marginal rate of tax and can withdraw 25% of your fund value tax-free when you retire. The introduction of the pension freedoms in 2015 means that there is flexibility in how your income is provided. This means that you have more choice as to how to take your income and are no longer limited to purchasing an annuity through your pension provider.
Pensions have also become an effective way to pass down wealth to future generations as they are distributed separately from your estate and Will. This means that most policies are not included in the inheritance tax calculation which is carried out on your assets when you die. As such, they can be a great vehicle for those who may have a potential inheritance tax liability on death, to pass down assets, which will not suffer an inheritance tax charge.
It is also worth reviewing old policies that you have to make sure ensure that they now offer you the full range of options. For example, some older contracts may offer you restricted income options but they may allow you to transfer your ‘pot’ to a new pension contract where you can benefit from the full range of flexible income options. You might also find that once you stop contributing to your pension and become a ‘deferred member’, the charges within the old pension increase.
Whilst the best way to build up your pension pot is to start contributing early, do not be tempted to put every spare penny into your pension, as you cannot access your pension until are at least 55. Therefore, it is important to have an accessible ‘emergency pot’ should an unexpected cost arise.
Our top 4 money management tips
1. Do not compare yourself to others and avoid trying to ‘keep up with the Jones’ everyone is different, and you never know what is happening behind the scenes.
2. Make sure you have an accessible emergency fund that covers at least six months of family expenditure as this will provide some comfort during rainy days or if you are made redundant unexpectedly.
3. Research your employer’s death in service policies and pension contributions and consider ways to maximise these policies. For example, if you increase your monthly pension contributions, will your employer increase theirs?
4. Stay on top of pension and tax legislation changes.