The only constant in the world is change, and that has never been more apparent than in the last few years. While Covid-19 may have been the catalyst, political uncertainty, environmental concerns and technological developments have all contributed to a blurry future.
In financial planning, we expect uncertainty. While we can’t plan for everything, we can put some sensible contingencies in place that will help you achieve your goals regardless of what is going on in the world.
It is all too easy to put off financial planning until things ‘settle down.’ But there will always be a reason to procrastinate. Even taking small steps now can make a big difference later on.
Manage Your Budget
Working out your budget is the first step towards financial security. If you are spending less than you earn, you can put the extra money to good use, for example:
- Building up an emergency fund
- Paying off debt
- Topping up your pension or ISA
- Investing in qualifications to improve your employment prospects
If you are overspending, an honest look at your budget can help you to catch problems early on, and avoid spiralling debt. Any of the following options could help:
- Earning more money, for example by starting a side business, taking on a part-time job, or seeking promotion
- Switching to better deals on your household bills
- Learning skills such as DIY or car maintenance to save money on repairs
- Moving debt to a low interest loan or 0% interest credit card
- Using different bank accounts for different purposes. This ensures that bills are covered each month and helps avoid overspending.
Build Up a Safety Reserve
Your cash reserve is the foundation of your financial plan. It should take priority over repaying debt or investing money. Without a cash buffer, an unexpected bill or short period of unemployment can easily throw your plan off-track. If you have the option to dip into your savings rather than relying on debt, you will save money and stress in the long-term.
Here are some tips for building up a cash reserve:
- Save consistently every month, even if it is a small amount.
- Pay into your savings account by direct debit so that it becomes just another bill rather than an optional extra.
- Increase the amount you save each year, for example if you receive a pay rise or your tax reduces. This helps to grow your savings without impacting your lifestyle.
- Shop around for the best interest rate.
Protect What Matters
Death, illness, and disability are not pleasant subjects to think about, but they should really be discussed more. The immediate effects can be devastating, but the financial consequences can last for many years, making a challenging situation even more traumatic.
The loss of a main income can quickly push a family from relative financial comfort to poverty.
There are options to protect against the financial effects of bereavement or illness, for example:
- Life cover – provides a lump sum on death
- Critical illness – pays out a lump sum on diagnosis of a serious illness
- Income protection – provides a regular income if you are unable to work due to long-term illness or disability
Most people should have a combination of all three, although the best solution will depend on your family circumstances and budget.
While insurance can’t cover every eventuality, it can help to provide security at a difficult time.
If you have debt, you will have fewer options in uncertain times. By reducing debt, you can lower your outgoings, improve your credit rating, and ensure that any surplus income can be put to work for you, rather than your creditors.
Expensive debts such as loans or credit cards should be cleared first. If you repay smaller debts first, you can use the saved repayments to pay off larger debts more quickly.
If full repayment is not possible, consider moving to a better deal, for example a 0% interest credit card. But always make the maximum affordable repayment, and never be tempted to use the card for spending.
Mortgages are usually a lower priority for repayment as interest rates are often lower. However you may be able to make regular overpayments, significantly reducing the interest you pay over time (as well as your mortgage term). Alternatively you could consider switching to a cheaper deal.
Investing is the final piece of the puzzle. Investing regularly is the best way to grow your money over the longer term. Of course, it is not without risks, but equally, there is a risk attached to not investing. Cash in the bank (or under the bed) is unlikely to hold its value once inflation is taken into account.
Making monthly investments can help to spread the risk, as you can benefit from both the upside and the downturns. When the market is rising, you receive investment growth. When the market is low, you can buy more shares at reduced prices. As we can’t predict or time the market, this is the best way to profit from price swings.
Here are some additional tips for investing during periods of financial uncertainty:
- Join your employer’s pension scheme. Not only is this tax-efficient, but you will also benefit from matched contributions.
- Invest in tax-advantaged plans such as ISAs or pensions where possible, as this will help your savings go further.
- Aim to reduce the costs on your investments and seek value for money.
- Hold a wide variety of asset classes across a range of countries and business sectors. We cannot predict which assets will perform well at any given time. This ensures that you benefit from market growth, while managing some of the risk.
- Invest for the long-term. An investment period of at least 10 years is usually enough to iron out the worst of the short-term market volatility.
A good financial plan is one that works in all weathers. The best time to start is now, regardless of what is happening in the world, the market or the economy.
Please do not hesitate to contact a member of the team to find out more about financial planning.