Financial Planning can be daunting. With thousands of different investment funds to evaluate, differing views on the world economy, dozens of types of insurance policies, and varying levels of taxes in each country – it can be easy to go round in circles or put things off. As with most challenges, it helps to break things down into smaller blocks and you’ll find that it’s not so scary after all. We’ve put together 6 simple financial planning tips for you to help you plan for a secure future.
1. Have a cash buffer
You should have three to six months of your normal income in a bank account that’s safe and liquid. You should also budget for planned expenses. There’s no right or wrong answer about how much cash to have, but you need to be prepared in case you need money for hospital treatment, unplanned trips or in case you become unemployed.
If you have a more than three to six months of income in the bank, ask the question what rate of return are you achieving? Can some of the cash be invested to achieve a higher rate of return and plan for the future?
2. Plan for your children’s education expenses
If you have children, depending on their age, you may have already started saving for their university tuition. The best advice from financial advisors is to start saving as early as possible after your kids are born, even if you can save only a small amount.
Outline the costs of educating children at university in your home country. Bear in mind that even though they may be British nationals, for example, if they have lived abroad for several years before university they will be charged at the higher tuition rate for overseas students. It is also important to consider that over the years, university tuition rates have been increasing at rates much higher than inflation. So by the time your children have grown, fees may well be higher in real terms than they are now.
University fees make lots of headlines, but start saving when your kids are young and it will be a time you look forward to!
3. Have the right level of insurance
People in their 30’s to 50’s should ask the question, “what happens if I’m not around to provide for my family’s future”? Only a 21% of families have the right level of insurance.
Most people think they are appropriately covered with their insurance policies, only to find out too late that they’re not. Check your health insurance, your home insurance, and your life insurance policies to make sure you have the right level of coverage and you’re getting the best deal.
You should have enough insurance to cover all outstanding commitments like mortgages, future expenses such as your children’s education until they are adult, the expenses of dependents such as stay-at-home spouses and elderly parents and costs such as day-care which could increase if one spouse passed away. Another simple rule of thumb is to calculate roughly how much you would make over your entire working lifetime, and insure for that.
Also consider property insurance and critical illness insurance – how much would you need in each of these scenarios?
It is unpleasant to think about this kind of possibility, but the peace of mind of knowing your family will be safe and provided for even if the worst happens to you will make up for it.
4. Start your retirement planning early
When you’re young retirement seems so far away that it’s easy to put off planning. If you are not making quite as much income as you’d like it’s tempting to think “I have to make ends meet properly first and once things are better I can think about saving”. On the other hand, if you are happy with your income, it’s then tempting to assume “Things are going well – I’m putting some money away each month – things will be alright”.
However, even if you are saving each month, if you do the math, increased life expectancies and rock-bottom interest rates might mean you need to save an even larger chunk of your income than you had imagined.
With retirement planning, the earlier you start, the better. You will have to save less each month, can afford to make slightly riskier but higher yielding investments, and you have more time to adjust your lifestyle – foregoing that extra night out is less painful if you know that doing so will let you make your savings target for the month. It only takes a few hours to forecast incomes, saving rates, retirement ages and so on, and we’d be happy to help.
5. Choose your investments
Gone are the days when you could just invest your savings in your local bank’s savings account or pay into whatever pension plan seems standard. Interest rates are now much lower than they used to be, which means that your retirement savings grow more slowly over time. It also means that fees and small differences in yields, which were sometimes overlooked in the past, can now make a major difference to your investment income.
So it’s now critical to look at all investment alternatives, including stocks, bonds and property, and choose carefully. Rather than just go for the safest and most liquid options by default, it is also important to consider whether you can tolerate a little more risk in part of your portfolio in exchange for higher returns.
For some, choosing investments is a pleasure, while others don’t know where to start. A financial advisor can help you put together a diversified and balanced portfolio which is appropriate for your risk profile and fits into your personal financial plan.
6. Consider investment property
Investment property, or commonly “buy-to-let”, is one of the asset classes that is often overlooked by individual investors and can offer a higher return than traditional investment options. Real estate is an attractive investment because it provides an inflation hedge (its value and rents tend to rise with the overall increase in prices), with less day-to-day volatility than stocks.
It is also one of the investments that individuals can make with borrowed money. While most individuals might not be comfortable borrowing to buy stocks, more are comfortable buying property with a 30% deposit mortgage, and covering mortgage payments with rents.
This can make for an attractive return, but it is important to do the maths and consider the risks carefully. A financial advisor can help you determine if this is an appropriate option for you and help you with the calculations.