All this week, Morningstar is supporting Financial Planning Week, the Institute of Financial Planning's national inititative to promote successful financial planning. Day two focuses on those who are at a crossroads and may be considering some lifestyle changes. You may not consider yourself to be part of this group but you no doubt know someone who is.
If you’re at the stage in life where you’re considering making some pretty big commitments, such as buying a property or even marriage or having children, then your financial goals are clearly going to need a rethink.
Yet only 12% of 24-34 year-olds surveyed said they have drawn up a financial plan that they regularly review. In fact, while a fair proportion said they occasionally review their plans, 60% said they don’t have a plan at all. It’s hardly surprising, therefore, that almost half (43%) of all survey participants said they find themselves short of money from time to time and struggle to last to the next pay day.
“This is an ideal time to start planning your financial future,” says Keri Carter, chartered financial planner with Broadway Financial Planning Ltd, “by setting goals early, you can look to maximise your working years and have a clear idea of what you are aiming for both in the short and longer term.”
Dennis Hall, chartered financial planner for Yellowtail Financial Planning Ltd agrees, but he warns of the temptation to neglect goals just because the rewards are in the distant future. “Many financial goals are set well into the future leading to financial planning being dismissed because there is very little tangible stuff to deal with. Short term goals are somewhat easier to handle because the rewards come that much sooner.” For example, planning and saving for next year’s summer holiday is easier than thinking about retirement needs because the reward is easier to visualise and it’s simpler to budget for, Hall says. Still, even short-term goals can be achieved more efficiently with a bit of planning: “Those people who do plan for short term goals such as holidays will probably notice that they achieve their goals with less debt than their friends who rely on credit cards to balance the books,” Hall points out.
Marlene Shalton, vice president of the Institute of Financial Planning and a chartered financial planner with Bluefin Group has some clear tips for setting up a savings programme, starting with asking yourself a few simple questions:
1. Do I need an emergency fund, that is money I can get at quickly, and how much? If you do not have one then this is the first pot you need to build up.
2. How much can I commit on a regular basis without it hurting the monthly budget? There is no point starting a grand savings programme if you find three months in you cannot afford it or you need the funds for something else.
3. What am I saving for? Setting your goals is half the battle: it's much easier to save if you have a tangible reward at the end of it.
“Decide on how much risk you want to take and how long you plan to save for,” Shalton says. For example, investing in the stock market is unlikely to be your best bet if you plan to save for, say, five years to put down a deposit on a house. But if you are investing for the long-term, you can afford to take on more risk and achieving long-term investment objectives will require exposure to some form of riskier assets such as equities.
In addition, diversifying your portfolio and spreading your risk is a key feature of sensible investing. “Avoid putting all your eggs in one basket,” Shalton warns. “You need a return over time that will beat inflation and this is where long-term investments can help, so having a combination of cash and equity savings is usually the best way, if you can afford it. Equity-based investments have the potential for greater growth than deposit-based investments, especially over a period of time.”
This article by Morningstar’s Christine Benz provides some useful tips for assessing how much risk you can afford to take, while here David Kathman explains the benefits of diversification. In addition, Morningstar's Instant X-Ray tool is a useful way of spotting at a glance how well diversified your portfolio is—whether it be your actual portfolio or a fantasy portfolio that you are using to test the water.
Speaking from personal experience, it’s often those last few days of the month when dipping into debt seems like a feasible—or perhaps the only—option, so it’s reassuring to see a rise in the proportion of survey participants claiming to not have any outstanding balances on bank cards, store cards, loans or overdrafts: just 25% compared to 37% in 2008. There appears to have been a national tightening of the purse strings: hardly surprising given the economic turmoil of the past two years.
“It’s interesting to see that despite the current recession and rising unemployment, those surveyed saw their credit and store card debt reducing by a considerable amount,” Keri Carter commented on seeing the survey results. “I think for many in [the 24-34 years] age bracket, the economic downturn has brought an end (perhaps temporarily) to the “glory days” and it’s encouraging to see that people are responding in a prudent way.”
However, the survey also revealed that use of unauthorised overdrafts, which can be particularly painful in terms of fees and charges, has risen: an aggregate of 2% are currently beyond their agreed overdraft limit—double that of last year and the biggest percentage increase across all debt/loan categories (excluding mortgages).
“Reducing and minimising debt should always form the basis of sensible financial planning,” Carter says, “whilst interest rates on savings remain so low, there is little point in having savings but paying higher rates of interest on debt, so always look to offset debt where possible.”
To find out how one financial planner advised a debt-ridden young professional to address his finances, read Monday’s case study by clicking here.
Having an emergency fund and suitable insurance in place to cover the unexpected are also important factors in successful financial planning. Carter advises that, whilst it is not possible to cover every eventuality, it is important to make sure you have sufficient insurances in place to cover any large debts such as your mortgage should a potential catastrophe unfold. “Consider whether income replacement cover in the event of long-term illness is affordable and whether your finances could withstand the effect of a critical illness,” she says. Checking your employment contracts is another way of reminding yourself where you would stand if something untoward were to happen—you may find that you are entitled to certain benefits that could that you might have considered purchasing unnecessarily.
This article can help you asses whether you are adequately insured against risk.
“At this stage, as with every other life stage, it’s important to ensure your money is working as hard as possible,” Carter concludes. As such, she suggests taking advantage of mortgage brokers London & Country’s, offer a free mortgage review service. And to ensure you’re not paying more than you need to for utilities, check www.moneysavingexpert.com, which provides regular “best buys” and is a useful source of financial data.
The IFP’s Financial Planning Week survey, was compiled by YouGov in association with NS&I. All survey figures, unless otherwise stated, are from YouGov. Total sample size was 1,896 adults. Fieldwork was undertaken between 29 June-2 July 2009. The survey was carried out online. The figures are unweighted. Regional breakdowns and variations are available upon request.
