Archive for the ‘Financial Planning’ Category
The law on pensions has changed dramatically in 2012. Between then and 2018 every employer must:
- Have a pension scheme
- Automatically enrol eligible* employees
- Contribute towards the scheme
*A worker is eligible if they are between 22 and the State Pension age, earn more than £10,000, have a contract of employment and work in the UK.
The new rules do not apply to owner directors and their spouses, unless they have a signed contract of employment. Even though it is not compulsory, you may want to consider setting up your own scheme because contributions from your company are tax deductible.
There are a number of options.
Work with an Independent Financial Advisor. This is likely to be the quickest and easiest option but also the most expensive. Expect to pay £2,000+.
The Pensions Regulator has published a step-by-step guide click here. We found a free online service option for employers at https://www.autoenrolment.co.uk/. There are charges for employees and I do not believe there is any advice built into the system.
Another online option, which does include built-in advice from a registered Independent Financial, is https://www.myauto-enrolment.co.uk/. At the time of writing the price is £435 plus VAT.
If you would like to talk about this or want an introduction to an Independent Financial Advisor get in touch.
I am delighted to tell you that from next month I am able to offer free financial planning software.
Here is some background why I am doing this.
A survey of 1,600 people revealed that less than a third of 40-70 year-olds have taken advice about the upcoming pension reforms. And, only 16% of these have taken advice from an independent adviser. This means, 95% of people have NOT taken professional independent advice about one of the crucial issues of their life.
This is worrying because Age Concern are worried that Pensioners could run out of money by age 75 if they choose to withdraw cash from their pension savings and use income draw down, rather than buy an annuity.
At Sackmans we work to help people achieve financial freedom. The first step is calculating what that means so from next month we are able to offer all clients free access to E-life Planner. This is a lifetime cashflow calculator designed especially for business owners and includes the valuation of your business.
When you know how much money you need for the rest of your life you can figure out how much you need to sell the business for, what profits you need to make and retain as well as can slow down and stop work knowing you won’t run out of money.
If you are interested in using the Life Planner let me know.
It is so easy for us all to be caught up living for today and hoping tomorrow will take care of its self.
However, for the sake of loved ones we should all set aside some time to consider the impact of becoming seriously ill, incapacitated or dying in an accident.
Yes, it is possible to take out life insurance to cover loss of earnings but what about the business, employees and customers? Insurance will not cover everything, only planning will.
One option is to enable the business to continue by creating a management team which can include:
- Close friend
- Key employees
- Your business coach
But, if the business cannot survive without you then are there things you can do to maximise the business value for you, or your estate.
This could be called your “disaster plan” which couple be lining up a competitor to buy your business. Whatever the plan is you will know in advance that the people involved in the plan are happy.
One thing many people overlook is a lasting power of attorney. This is someone who will act on your behalf if you are alive but unable to make decisions for yourself. Someone you trust can take over until well enough to take control again.
The most fundamental element of radical retirement planning is your mindset.
If you have read some or all of the articles on this subject you could be thinking you could not give up so much convenience, luxury and enjoyment. But, the point is that it’s not about giving up but getting.
A smoker who wants to quit is better off thinking of all the benefits they are going to get (like good health) rather than thinking they are giving up the enjoyment of smoking. It’s the same with our expenditure.
Radical retirement planning starts by understanding that we have a built in programme which gives us an insatiable appetite for MORE of everything. This is not a mental disorder or a moral shortcoming, it is just part of the way we are from way back.
Our ancestors were insatiable. They always wanted more food, more social standing and crucially more security. They achieved this with more mates and by having more children.
Insatiability was great for survival but in the modern world we don’t need to be so worried about being killed by our enemy. Insatiability does not lead to more happiness; in fact it can lead to the complete opposite.
To experience happiness today, we have to trick ourselves into being happy by buying things. But, as soon as we buy something there is a drive to buy something else.
There is a good argument that most of us waste our lives in a pointless pursuit of happiness. We have goals and desires that we start to chase but the problem is that each desire or goal achieved is just replaced by a new one.
After a lifetime of chasing we can end up no more satisfied than he was at the beginning despite all the consumption along the way.
The answer to this catch 22 could be known for a long time. Back in Roman times Stoics worked out to learn to want the things you already have. A technique that helps you achieve this is Negative Visualization.
Close your eyes and think about your life with not having something you have, perhaps not having your eyesight. Imagine how your life would be day-to-day. Now, open your eyes and be happy that you can see. Appreciate the colours and the expressions on your loved ones faces.
If you practice Negative Visualization, you will appreciate your current life much more and be truly happier without spending a penny.
The next great trick is the one that allows you to eliminate anxiety about the present and the future. This comes from the book The Power of Now.
The mind is always working, thinking about the past or future. They key is to quieten the mind and focus on the now. So, instead of worrying about what may happen in the future with your health or money you simply focus on now. If you don’t have a problem this second, enjoy not having a problem. If you do have a problem, go and do something about it.
The third trick is to seek out discomfort by doing things that make you feel uncomfortable. A simple example is not turning on the heating on a cold day or booking a camping holiday with a tent when you could afford a luxury mobile home.
It sounds weird but doing this helps you expand your comfort zone. The complete opposite philosophy is someone who becomes irritated if they ever have to travel in less than a first-class, stay in less than a five star hotel or drink anything but Champagne.
By using voluntary discomfort, we appreciate far more of our life, and can be content with a much simpler and less expensive way of life.
Understand your mind and take control. Use your mind to create happiness and put yourself into uncomfortable situations so you can enjoy the simple things in life.
According to research by the Skipton Building Society the typical UK family now spends £5,077 on food a year, £423 a month.
There is definitely an opportunity to save money on food. Not just by buying less but by changing what you eat.
If you are serious about implementing a radical retirement plan then it’s time to look at food in a new way…break it down into calories and shop to a budget.
With three meals a day, that works out to be 91 meals a month each. If the average person needs 2,000 calories per day so you need to each meal to have 667 calories.
Can this be done for £2, £1 or even 75p a meal? Yes, but you will probably need eat differently and less.
If you could hit the 75p a meal then your monthly food bill would be £274 a month for four. How much of a saving would that be for you? Every £150 a month off the food bill over 10 years is worth £23,292, compared to paying down your mortgage or saving is a plan than returns 5%.
Look to get your calories in non-expensive foods. And, look to shop in low cost shops and buy shop brands.
Take inspiration from around the world. People in India know that great food is all about preparation and spices, rather than costly ingredients, the same for Chinese and Thai food.
Needless to say, no more takeaways!
A radical retirement plan needs to be underpinned with strategies on all forms of expenditure. This articles looks at cars.
Ignoring our home, a car is often the second most expensive thing we will buy. I deliberately used the word “thing” rather than “asset” because unlike a home, a car (unless it is a classic) will always go down in value.
A car is NOT an asset and it is important to recognise this because the first rule is that you should never borrow money to buy something that goes down in value. However, many people do. According to an article in the FT in October 2013 75% of new cars are bought with direct finance.
This is interesting because in the book The Millionaire Next Door (which you can get from the library rather than buying) you will find that self-made millionaires never buy new cars and never buy on credit.
Think about it this way. Should you spend ALL your money on a car? If the answer is no then why would you spend more than all your money because that is what you do when you buy a car with a loan?
But, assume you do have the cash to buy a car outright and the local dealer is offering finance at say 2%. You could think borrow the money cheap and invest my cash and get a higher return. Sounds good?
Well, you’d be wrong because you need to look at the total cost per year and the cost per mile rather that the cost per month. When you do this it can change your choice of car and your driving style!
The most important factor is to reduce the amount you use the car. A two car families can become single car and you could be looking at 10,000 miles a year or even 5,000 miles a year, especially, if you look at the car as a luxury and restrict your use. This means a modern car could last you 30 years.
This is important to appreciate because when you buy a car you are buying the future mileage. And, like any good business you don’t want to carry too much stock. You are paying for something you will never use!
Let’s look at example.
Car buyer A buys one of the lowest cost-per-mile small cars for £15,000. He drives it for 13 years, traveling 200,000 trouble-free miles.
Compared to paying £15,000 off part of a 5% mortgage or making an investment that pays a 5% annual return the real cost is £31,705.
Car buyer B buys the same car but six years old with 90,000 miles the clock for £6,750. They can only get another 110,000 miles out of the car which takes 7.3 years. They then buy another used car to cover the remaining 90k miles for £5,625.
Buyer B uses up £6,750 over the 13 years, which is worth £12,912 if it were used to pay off part of the mortgage or in a 5% investment plus the additional £5,625 for the extra 90,000 miles for the final 6 years. This has a cost of £7,588.
So at the end of 13 years, car buyer A costs £31,705 while buyer B cost was £20,500. This is a saving of 35% or £11,205 every 13 years. And, this is driving essentially the same car.
You just need to ask yourself what’s important to you. Looking like you are well off and driving a new car or being well off and having financial freedom?
The truth is that well over 90% of the car market is people are buying cars that they cannot really afford.
On the topic of radical retirement planning, we should consider the costs of cars and travelling.
Take the example of a couple who each travel 19 miles a day in the commute which takes 40 minutes. Most would think this is not “too-bad”.
But, think again – 38 miles at 25p per mile cost is £9.50 a day plus the time cost. If you work 240 days a year that works out to £22,800 but that is not the opportunity cost. Had that been invested over 20 years with a growth rate of 5% you would have £78,096.
40 minutes a day each way adds up to just under an extra day a week. This is two and a half months extra pay a year. If you take home £2,500 a month each then the value of your time is £12,500 a year. If this was invested monthly at 5% you’d end up with £411,033.
So, that commute in the morning (where you risk your life) is actually costing close to half a million. If that sounds ridiculous that is because it is.
Also keep in mind that many cars have a loan associated to them. So, your radical retirement plan could include these actions:
- Move closer to work, work from home or change jobs
- Walk more and/or use a bike every day
- Only have one much cheaper car*
*Even if you allow for a small fund to keep the cheaper car on the road you will be far better off.
Keep in mind that the time it takes to walk or ride to work counts against the time you’d need to spend in the gym. And, it also means you can cancel the gym membership that you don’t use anyway.
This also applies to non-business trips. Think twice before you head off for the day on a jolly and instead think of creating a more local lifestyle.
If you want to embrace Radical Retirement Planning and save 50% or more of your after tax income you cannot afford to have any payments on debt other than your mortgage. This includes student loans, credit cards and car loans – they all need to go.
Remember, debt has a double whammy. You are paying interest rather than savings money and making earning interest.
Traditional financial planning suggests creating a budget and “working-on” getting rid of the debt over a manageable and comfortable timeframe.
Radical financial planning approaches debt slightly differently. We don’t have years to clear this, we only have months. If you are serious in being financially free in 10-15 years you need to clear this debt as an emergency. Like you had to save what you owe in debt to pay for a life-saving operation.
So, stop all non-essential spending and change your lifestyle. This basically means spending nothing apart from food and transport to and from work.
Here are some specific suggestions on what you can cut out and use to clear your debt:
- Meals out
- Going out for drinks
- Costa coffee
- Buying lunch at work
- Gym membership
- New clothes
You can also change your lifestyle:
- Change your car (or go car free)
- Walk whenever possible
- Become a vegetarian for a while
- Take an extra job
- Take a lodger
- Rent your garage or loft space for storage
- Rent out your drive/parking space
- Sell jewellery and toys like an expensive bike and jet-ski
There will be time for some of these things to return later as part of a plan. But, for now you need to be 100% focussed on clearing credit cards and non-mortgage debt.
It should only be a matter of months and all credit cards and non-mortgage loans will be gone forever.
As part of my research into lifestyle money management I am being challenged on my own preconceptions what is possible. I hope the articles I write challenge you.
Here is a simple formula to think about – radically change your lifestyle and save 50% (or more) of your current after tax income, invest it wisely and enjoy a more secure and free life in the future. If you had done this from the age of 20 you would probably be able to retire at 37.
Depending on your current income and asset base you could be just 10 to 15 years away from financial complete freedom. How does that sound?
As always, there are choices
- Work longer than you need to
- Make more money
As a business owner have the option of developing your business and making more money. But, you will need to make a lot more and save a lot more because:
- You tax rate will go up
- Your base expenditure will be 100% higher (or more)
The thing about focussing on saving is that you learn to live on much less. This means you need less capital to live on. If you focus on making more there is a good chance you will fall into the trap of spending more.
What’s interesting and potentially makes the saving focus a better option is that it is really about living a better quality life.
Here are some suggestions on how you can live on 50% less. I will explore each one in future articles.
- Get rid of emergency debt
- Live close to work
- Don’t borrow money for cars
- Ride a bike
- Cancel Sky and the TV licence
- Stop wasting money of groceries
- Only use basic mobile phones
- Use your body more
I continue my research into effectiveness personal money management and as with business development it all starts with personal development. If you want to change your situation you need to change your thinking.
Consider the idea of there being three of you – the past, present and future you.
The reality is that the past you has put you where you are today; his or her decisions with money has determined your current situation.
If they worked hard and saved you can thank them because you will have some level of financial security and could be well on the way to financial freedom. If they have been a little irresponsible and frivolous then you could be anxious about the future.
But the “present you” can change that for the “future you”.
You can literally give yourself a better future by changing your thinking and behaviour. The key is working ON your life not just IN it and you can do this by having a plan. As with a business plan your life plan will have a vision, assumptions and fundamental methodology.
The actions will include changing your behaviour and saving. This can be challenging because it takes time and money away from the “present you”. It can feel like you are denying yourself of happiness. But, you can learn to enjoy a different lifestyle and be happier now. Part of this is thinking of saving and personal development as a gift to the “future you”.
A £1 saved now will be return yourself more than a £1 later. An hour invested today developing yourself and improving your effectiveness will save you more than an hour later. In 5, 10 or 20 years you could look back at yourself today and the action they took and thank them.
What you do now is a gift to yourself and your family. Start to develop a personal plan and question your lifestyle choices and make sure your being smart with money.