Archive for the ‘Financial Planning’ Category
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.
There is a lot of advice available on making, saving and investing money but little on how to spend money. So, I was interested to find a book based on scientific research.
The book “Happy Money: The Science of Smarter Spending” explains why we should shift our focus from earning more to spending differently.
There are five key principles to spend smarter to be happier. The great thing is that you could end up being happier with less and this could fundamentally effect your business strategy.
Remember, your business is there to serve your life so if you change your life you should review your strategy. Perhaps you could afford to part-company with high hassle clients/customers? Perhaps you don’t need the volume of business and can stop giving discounts to win new business.
Here are the five principles…all are common sense but not always common practice.
Material things (from big houses, boats and flash cars actually give less happiness than experiential purchases (like holidays, concerts and meals out).
Make it a treat
Limiting consumption of the things we enjoy may help increase our appreciation and enjoyment from them.
If you have your favourite bottle of wine once a week, limit it to once a month or even once a quarter.
Allow yourself to pay other to deal with the dreaded tasks you hate.
This can apply to domestic tasks like cleaning and ironing and to bookkeeping. Remember, you will be spending less on “thing” and need to the time to enjoy “experiences”.
Pay now, consume later
Delaying your consumption enables you to enjoy the anticipation.
This may mean not booking things last minute. Instead, book a table for dinner weeks in advance and a holiday 6-12 months early.
Invest in others
New research shows that spending money on others gives you more happiness than spending money on yourself. This can be people you know or charity which fits with our giving with B1G1.
The really cleaver thing is you can combine the principles and they have a cumulative effect. So, the more principles you use to any spend the more happiness you will enjoy.
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
- Expected inheritances
- 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!
Are you ready to wake up?
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
- Stop smoking
- Rent out loft space for storage
- Rent out your driveway as parking
- Cancel the gym and walk more
- Shop smarter
- 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.