Finding out about you and producing a cashflow forecast is great but all good plans need to be monitored.
One way of doing this is to use Xero cashbook on your personal money. You can set budgets on personal expenditure and track actual spending. This will make you more money conscious by helping to keep your important personal goals in mind on a day-to day basis.
The software includes bank feeds which pull information in from your bank and credit cards. This eliminates data entry and the “rules” feature makes allocating transactions even faster. After two or three months you will just by clicking the OK button in Xero to confirm transactions.
We can review your budgets every month, quarter or just once or twice a year, depending on what you feel you need.
Having a review helps holds you accountable and enables you to refine and develop your budget which can then feed back to the life plan.
The idea is that you will create an enjoyable and sustainable life where you maximise your happiness by focussing on what is most important to you.
Once we know what’s important to you we can move on and start to explore if your financial arrangements support your goals.
We do this by creating a cashflow forecast for your future, based on your current expenditure patterns. Without this we are you are just guessing and cannot be 100% confident that your planning is the best it could be.
The cashflow runs from today until your expected date of death and includes exceptional items such as:
Tax free lump sum from your pension
Downsizing your home
Gifts you plan to make
Expensive holiday’s holiday homes and boats
The cashflow forecast is very visual because it includes a graphical representation. This allows you to:
Understand how different investment returns and inflation will affect your goals
Have peace of mind that the financial decisions you make are the right ones
See how things would change if your business increased its profits by 10% a year
Look at the impact of downsizing and/or doing equity release
Understand what would happen if you were able to change your spending habits
See what would happen if you overpaid on your mortgage
Work out what would happen if you lived an extra 10 years
Ask yourself “would it be helpful to see what is about to happen in your future?”
For some this is scary because they feel they are looking into a black hole. But, this is an opportunity to be honest and (for some) to become financially mature.
Sometimes, to achieve your dreams you need to wake up…the cashflow forecast is the alarm clock!
The first part of lifestyle financial planning is finding out about you.
Interestingly, this sometimes means you finding out about yourself. How often do you get the chance to really think about what’s important to you on a personal level?
Most of us live a fairly hectic pace and rarely get 5-minutes to stop and think.
One of the ideas you can use to help you think is called the circle of life. But, with lifestyle financial planning we also recommend you think about (and question) your daily, weekly, monthly and annual expenditure.
Doing this helps us dig deep and find out what is really important to you.
For those of us who are lucky enough to have young children we often want to help them get through higher education and/or get on the housing ladder?
Other questions and topics that can arise are “when can I afford to slow down and work when I want to?” And, “what do I need to do to make sure I never run out of money?”
When you have all your financial and non-financial priorities sorted and organised you can start to think about and question your current expenditure.
Do you need to use the car for all the trips?
Can you waste less food?
How important Costa Coffee and other small luxuries are compared to achieving your dreams?
You can also think about your life choices. Could you get more enjoyment from simple pleasures than convenience spending? Maybe you consider cooking for friends and family at your house rather than going out for dinner.
Does your current expenditure give you true happiness and well being? Or, are you like many people spending on auto-pilot, literally programmed by the TV?
If you’d like to review your personal financial plans get it touch.
Lifestyle financial planning is a new approach to personal financial planning.
It’s not about selling you financial products like pensions and insurance but helping you get the life you really want. The aim is to help you gain control and master money.
This style of financial planning is both logical and emotional. The planner will dig deeper into your life and explore your relationship with money. The process challenges your relationship with money and helps you establish your personal goals.
It is important that the planner gets to know you and helps you identify what’s REALLY important. You will explore the things you want to achieve in your lifetime and define the lifestyle you want to enjoy both now and later in life.
The second stage is pulling together your numbers and doing some number crunching to produce a lifetime cashflow forecast. This will give you a picture of your financial life based on your current expenditure.
Once you have this baseline you can play with the numbers and look at different outcomes from different expenditure choices.
The next stage is implementation where you do different things with money. This can include changing, buying and/or existing from financial products such as investment plans and insurance policies. It may also mean changing your financial habits – perhaps cutting back on some entertainment expenditure.
Finally, there is review. This is where budgets are set and reviewed. Reviewing your plan regularly connects your daily behaviour to your life goals.
When done well your life will change and so will your relationship with money.
Like any good plan it is adaptable and can be tweaked, like a ship readjusting the wheel to stay on course whilst the wind and sea constantly affect the ship. You’re your own captain of your financial ship…in control with a map.
So, will this style of planning benefit you?
It depends. Some people are not ready to face the reality of their situation. Others know they need to review their behaviour and welcome having someone hold their hand.
At Sackmans we like the saying “If you want your dreams to come true you need to wake up”. A dream needs a plan and a plan needs to be realistic, have specific targets and be reviewed.
The process usually takes 12 weeks. This gives you some mind time and means proper research can be done.
Most budget changes are small tweaks to the system and not worth writing about. However, the changes to the pension rules are different.
From April 2015 you will be able to get at all your pension fund. Beforehand you could only take out 25% tax free; you had to buy an annuity (right to income) with the rest.
As well as annuity rates being low, the main issue was that when you died the money used to buy the annuity was lost to the pension company.
The changes mean that you can now pull out all your pension savings, subject to having at least £12,000 of pension income (including your state pension). Yes, you will have to pay tax at the level you would pay tax if you earned extra money but keep in mind:
Money invested in a pension is tax deductible
Grow in a pension is tax free
I will be offering all clients a personal financial review where I produce a personal cashflow forecast. This is an ideal opportunity to consider setting up a pension or contributing some extra savings.
Remember that it is possible to control your pension fund via a Self Invested Personal Pension (SIPP). This means it is possible to lend your own company money from your pension fund, or even purchase an asset and lease it to your own company.
There are costs and risks but there are with anything. Whether you should do anything depends on your personal cashflow forecast. If everything looks good then you should look to product and reduce risks.
However, if things are not going to plan it could be worth considering taking some pension savings and investing in your own business.
I’d like to share with you a concept called “Pay Yourself First”.
The truth is that because we are living in a capitalist society, everyone is trying to get their hands on your money. Big businesses use clever marketing to take advantage of powerful psychological drivers that are hard wired into all of us.
Now, with so much temptation on a day-to-day basis, why not pay yourself first by saving some money for when you won’t be able (or don’t want) to work?
Yes, this may reduce your cash for other things now but the chances are you can reduce your monthly expenditure without affecting the quality of your life. In fact, you may find the less you spend the happier you are!
Is this all boring?
Perhaps, but I reckon it is much less boring than sitting around without any money to spend for years and years. That would be like living like a prisoner in your own home, you deserve more than that, don’t you?
Working out how much you need for the rest of your life takes a little time and energy but it’s well worth doing.
If you find there is a shortfall don’t panic. There are probably lots of things you can do in your business to improve what you take out. And, there are lots of thigs you can do with personal expenditure to reduce what goes out of your pocket.
Here are some ideas to get you going:
Paying off expensive debt like Credit Cards
Driving a different car
Drive slower so you use less petrol
Swap the second car for a bike
Do not buy anything on the spur of the moment
Taking less expensive holidays
Drinking less (or no) alcohol
Rent out loft space for storage
Rent out your driveway as parking
Cancel the gym and walk more
Drop a brand with food
Buy less food
Buy second hand books
Cancel paid for TV
Have fun by being prudent in the knowledge that you are paying yourself first.
Research by HSBC shows that UK population expects to spend 19 years in retirement but their savings will run out in 7 years.
Out of 15 Countries surveyed, only Egypt has a lower percentage of regular savers. The main reason being the cost of day-to-day living.
The research revealed that UK people want a retirement income of 73% of their working life income but 66% of the population are not saving enough.
Perhaps the most shocking statistic is that 81% of the population do not have a professional prepared retirement plan. However, 47% of people that invest in a professionally produced plan end up saving more.
The biggest retirement fears are financial hardship and poor health.
Business owners are in a unique position. They have the opportunity to create more income to fund retirement and capital value by developing their business.
Many of the ways to develop a business are low risk and cost little or no money.
The five actions recommended by the research are:
Step 1 – Get real about your retirement needs
With life expectancy increasing and the cost of living increase while investment returns falling it is time to put together a personal cashflow forecast to the date of your death.
Step 2 – Put your priorities in order
With 43% of people choosing to save for a holiday rather than their retirement, a change in spending patterns maybe required.
Step 3 – Be aware of major life events
When planning take account of major life events like starting a family, getting a deposit to buy a home, kids education and marriages.
Step 4 – Have a written plan
Commit to having a written plan and start saving now, even if it is small.
Step 4 – Ge professional help
The research makes it clear that professional advice pays. Looking at respondents with average incomes, those who use professional advice when planning their future have the greatest levels of retirement and other savings.
Although Sackmans is not regulated to advise you where to save, we can play a valuable role of working out how much capital you need to accumulate.
We can also explore the role of your business with a business valuation and profit improvement plan.
Our goal is to have all our clients in a position of financial freedom and security.
I’d like to introduce you to something called the Bucket Concept.
What we know is that many business owners avoid detailed financial planning. What I hope is that the Bucket Concept will help you get perspective of why detailed planning is so important.
So, I’d like you to draw a bucket in the middle of a piece of paper.
Now draw some water, about half way up. The water represents your total liquid capital that you can spend.
Now, draw a square above your bucket. That’s your business.
Draw another box next to it. That’s your house.
Draw another. That’s your pension fund.
Draw arrows coming in from your boxes into your bucket.
From your business will be your profit flowing into your bucket. This will come in every month.
But, there will also be one-off capital sums.
These can come from downsizing or selling your house, drawing your tax-free element of your pension and selling your business.
Now draw an arrow coming off the bottom of your bucket. This is your monthly expenditure.
Draw arrows for one-offs like Weddings and helping your kids get on the housing ladder.
Remember, in later life as you stop accumulating assets, what comes into your bucket may be less that what goes out.
The key question is are you going to have enough water in the bucket to take you to the time you kick the bucket?
Now, the only way to know is to complete a personal cashflow forecast.
Start with your current monthly expenditure. Then modify this for what you want and how your life changes.
Keep in mind that it is more common for people to transition into retirement; going from full-time to part time before doing no-time. This will need to be factored into your cashflow.
When you have a personal cashflow forecast you can use it to keep you on track, and is an initial method of quantifying those aims. Projected costs against projected incomes will identify those areas you need to focus on.
When you complete your personal cashflow forecast you will know your Life Number. This will be a figure of how much you need for the rest of your life.
When you have this you can work out if there is a shortfall or too much?
If there is too much cash you can think about stopping work early, spending a bit more.
If there is not enough you can exploring how to plug the leaks.
This could be modifying your expenditure.
But, not many people what to change their lifestyle and as a business owner you have the opportunity to put more into the bucket.
Your business is probably the only financial asset you have control of. You can’t effect the value of your house, investment returns, inflation or annuity rates.
Many business owners have the idea that they will build and sell their business to help fund their retirement. But, the reality is that most small businesses never actually get sold; they just close down.
This is such a serious issue that the Government commissioned a report. The Turner Report published in 2004 revealed that there is a Pension Crisis in the UK.
Lord Turner estimates 12 million people will not be able to retire because they cannot afford to. Many more millions will not live the life they really want when they stop work because of longer life spans, reduced pension returns and higher costs of living.
This was before the Credit Crunch and Recession which is having a profound impact on businesses and investment returns.
Many people, especially business owners make the mistake of vastly underestimating what it takes to maintain their lifestyle after they exit from the business world.
Annual income of £50,000 before tax requires an additional £1 million of liquid capital to go into an investment portfolio. For many, being a millionaire is a necessity rather than a dream.
Once you have set your lifetime goals, set a five-year plan of smaller goals that you need to complete if you are to reach your lifetime plan.
Then create a one-year plan, six-month plan, and a one-month plan of progressively smaller goals that you should reach to achieve your lifetime goals. Each of these should be based on the previous plan. Then create a daily To-Do List of things that you should do today to work towards your lifetime goals.
At an early stage, your smaller goals might be to read books and gather information on the achievement of your higher level goals. This will help you to improve the quality and realism of your goal setting.
Finally review your plans, and make sure that they fit the way in which you want to live your life.
What does SMART stand for?
A useful way of making goals more powerful is to use the SMART mnemonic. While there are plenty of variants (some of which we’ve included in parenthesis), SMART usually stands for:
S – Specific (or Significant).
M – Measurable (or Meaningful).
A – Attainable (or Action-Oriented).
R – Relevant (or Rewarding).
T – Time-bound (or Trackable).
For example, instead of having “To sail around the world” as a goal, it’s more powerful to say “To have completed my trip around the world by December 31, 2015.” Obviously, this will only be attainable if a lot of preparation has been completed beforehand!
Further Goal Setting Tips
The following broad guidelines will help you to set effective, achievable goals:
State each goal as a positive statement – Express your goals positively – “Execute this technique well” is a much better goal than “Don’t make this stupid mistake.”
Be precise: Set precise goals, putting in dates, times and amounts so that you can measure achievement. If you do this, you’ll know exactly when you have achieved the goal, and can take complete satisfaction from having achieved it.
Set priorities – When you have several goals, give each a priority. This helps you to avoid feeling overwhelmed by having too many goals, and helps to direct your attention to the most important ones.
Write goals down – This crystallizes them and gives them more force.
Keep operational goals small – Keep the low-level goals that you’re working towards small and achievable. If a goal is too large, then it can seem that you are not making progress towards it. Keeping goals small and incremental gives more opportunities for reward.
Set performance goals, not outcome goals – You should take care to set goals over which you have as much control as possible. It can be quite dispiriting to fail to achieve a personal goal for reasons beyond your control!
In business, these reasons could be bad business environments or unexpected effects of government policy.
n sport, they could include poor judging, bad weather, injury, or just plain bad luck.
If you base your goals on personal performance, then you can keep control over the achievement of your goals, and draw satisfaction from them.
Set realistic goals – It’s important to set goals that you can achieve. All sorts of people (for example, employers, parents, media, or society) can set unrealistic goals for you. They will often do this in ignorance of your own desires and ambitions.
It’s also possible to set goals that are too difficult because you might not appreciate either the obstacles in the way, or understand quite how much skill you need to develop to achieve a particular level of performance.
When you’ve achieved a goal, take the time to enjoy the satisfaction of having done so.
Absorb the implications of the goal achievement, and observe the progress that you’ve made towards other goals.
If the goal was a significant one, reward yourself appropriately. All of this helps you build the self-confidence you deserve.
With the experience of having achieved this goal, review the rest of your goal plans:
If you achieved the goal too easily, make your next goal harder.
If the goal took a dispiriting length of time to achieve, make the next goal a little easier.
If you learned something that would lead you to change other goals, do so.
If you noticed a deficit in your skills despite achieving the goal, decide whether to set goals to fix this.
Following on from the Primary Aim in my last post I’d like to show you a video from a Website called TED by Simon Sinek.
TED is a non-profit organisation devoted to Ideas Worth Spreading. It started in 1984 as a conference bringing together people from three worlds: Technology, Entertainment, Design.
Simon Sinek wrote a book Start With Why which is about how great leaders inspire.
The reason I have included this video is that I don’t believe you need motivation to be successful. Motivation is about getting hyped up and using adrenalin. What I believe in is inspiration by linking your Business Aim to your Primary Aim.
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