In the last of three parts, John Lowe of Money Doctors shares his wisdom when it comes to creating a financial plan for you and your family in 15 minutes…starting with
Five useful financial-planning tips
Bear in mind the following principles when deciding what your financial priorities should be:
- For most people, their greatest asset is their income. Unless you are fortunate enough to receive a windfall, it is almost certainly your income that you will use to achieve your financial objectives. Under the circumstances, you don’t want to risk it and you don’t want to waste it. There are all sorts of inexpensive insurance policies designed to protect your income. Incidentally, anyone under retirement age is 20 times more likely to be unable to work for a prolonged period because of sickness than they are to die, which is why I keep droning on about income protection often being more important than life cover.
- Personal debt, by which I mean everything from store cards to mortgages, will be the biggest drain on your income. If you’ve borrowed money (and obviously there are many circumstances under which this makes excellent sense), then you should make it a priority to repay your loans as quickly as possible. If you have over-indulged, remember the sniper approach – pay off the most expensive debt first and we are talking here of short term high interest debt. Lifestyle debt is something that should be avoided ( holiday loans, repaying credit card debt over a longer period etc )
- It’s vital to have a safety net or emergency fund ( RDF – rainy day fund ) to deal with those little trials, tribulations and extra expenses that life often throws our way. Also, you want to make as big a return as possible from your investments. As a rule of thumb, between 3 and 6 months of your net annual income should be the target for three reasons –
- Emergencies ( the clutch in your car goes )
- Sudden loss of income ( your bonus dries up )
- Investment opportunity ( deposit for your first home )
- If you’ve got a good, secure income, it doesn’t actually matter what other assets you possess. Emotionally, it’s nice to have the security of owning your own home. Financially, it certainly makes sense. But, actually, an investment that is just as good and maybe better is a really decent pension plan. With a good pension plan you can leave work early and, if you live to 100 or more, never have to worry about money again and you are NEVER too young to start. We are living longer healthier lives so income will be a major factor – in 30 years’ time there will be three times the number retired as there are today and while in 2018 there were 5 workers for every person retiring, in 30 years’ time there will only be 2 workers !
- Know thyself. There’s no point in setting financial objectives that you’re going to find impossible to attain. Your financial objectives may involve modest changes to your behaviour, but they shouldn’t require a complete change in your personality!