It’s true, money can’t buy you love. But, let’s face it, being comfortable financially definitely makes life easier, and often more enjoyable. Financial security, however, rarely happens by accident. It’s no good sticking your head in the sand and hoping it’ll all work out. Like everything else in your life, your finances need attention to help nurture and improve them.
For many people, there is a moment in their life when their finances are suddenly thrown into sharp focus. It could be when they suddenly lose their job, or when the boiler gives up.
For me, it was when my mum was diagnosed with terminal cancer at 64 and died 10 weeks later. She was going to retire at 65. I had done some cashflow planning for her the year before and she could have retired there and then, but she wanted to work for another two years. It was a stark reminder that things don’t always go as we expect them to. For some people, that might have been reason to think “well, it doesn’t matter how much you plan when the universe has other ideas”. For me, it exemplified the reason TO plan – be proactive about what you CAN control, and you stand more chance of living the life you want for as long as you are able.
The word retirement conjures up images of old people with walking sticks for many, I know when my grandad retired, he was working on a building site one day, and the next he had got out his flat cap and walking stick and hobbled into his vegetable patch.
What many people don’t think about, is that you could be retired for as long as you have worked, retirement isn’t the end of your life, it’s the start of a whole new chapter – and doesn’t have to include a walking stick or a flat cap!
Having a plan in place can give you the financial freedom in retirement that you want. Don’t forget everyone’s idea of what their retirement will look like is different. Just because the Jones’ want to travel the world and explore new countries, it doesn’t mean that your retirement plan needs to look the same. It could be that you are looking at more time with the family and enjoying hobbies at home. The income you will need will be different.
Timing is another huge factor, would you rather retire earlier with less, or later with more? What are your priorities? What are your other options? Could you go part time in the work that you do? Take longer breaks?
~Novel Serialisation: Heavens Fire~
Having worked in the financial services industry for over 25 years, I’ve seen lots of people who are approaching retirement age without having given their finances much more than a cursory glance for the previous 40 years. By the time you’re approaching retirement, options for improving your retirement outcome are limited. But by taking control of your finances early, you can transform your life.
Here are the key steps I recommend for improving your financial literacy and planning for your future:
Control Your Money Mindset
Money mindset is essentially your belief and attitudes towards your finances. A positive money mindset is about understanding that you have the freedom to spend or not spend. You don’t need to compare yourself to others. You take responsibility for your own financial situation and are happy with how things are looking.
A negative money mindset – is when you feel you’ll never have enough money and blame that on things outside of your control. This is not only limiting but can be very damaging.
Lots of things contribute to your attitude towards money – your upbringing, experience, the attitudes of those around you. But it is not something you are stuck with – you can learn to control and improve your money mindset.
For example, rather than thinking “I’ll never be able to retire at 60”, think “what can I do now to start saving towards achieving this goal?”. Try to find ways to flip any negative thoughts into something more productive and forward-thinking.
Know Your Finances
Before you can put together any financial plans for your future, you need to have a very clear picture of where you’re starting from. Where is your money coming from? Where is it going? And where is it when it’s in your possession?
This is when I recommend creating yourself a simple spreadsheet (I do love a spreadsheet!), with a column for income, a column for essential outgoings and a column for lifestyle outgoings.
Gather all of the paperwork you might need to help you complete your spreadsheet – bank statements, pay slips, any online income (such as PayPal), credit card and store card statements, savings account statements, pensions summary, supermarket vouchers – grab a cuppa, and get ready to document everything.
List all your income by type. This column is likely to be fairly simple and may just include your salary, although if you have any income from rental properties, for example, don’t forget to include that. Create a total of this column.
Next, document all those essential outgoings – mortgage, bills, insurances, food, and then your lifestyle outgoings – meals out, gym membership, TV subscriptions.
If you deduct the essential figure from your income total, it will give you the surplus (hopefully!) cash you have left at the end of the month. This is what you theoretically have available to spend on “lifestyle” outgoings. Compare that figure to the total of your lifestyle column. Hopefully the numbers all tally. Problems arise when your outgoings are higher than your income.
Taking the time to document your spending should help you begin to build up a picture of your financial circumstances. It may be the wakeup call you need to take action!
Figure Out Your Financial Focus
It’s now time to make sense of everything and start to look to the future by asking yourself some tough questions.
What is your financial focus? What are you working towards? What do you want your life to look like?
For better or worse, almost all of our life goals have a financial element to them, and this is where being financially savvy comes into its own.
Write down your short term and long-term goals, from holidays to where you’ll live, any plans you have for family, and, perhaps most importantly, your retirement. Even if retirement feels like a long way off, the earlier you plan for it, the more likely you are to achieve those dreams.
Take a bit of time to research your goals. How much money do you actually need? Then, give them a deadline – how long do you have to raise the funds? And finally, prioritise them. This is the opportunity to have a bit of a reality check. If your goals include the trip of a lifetime and buying your dream home, can you realistically save for both at the same time, or would it be better to focus on one first?
If you’re scratching your head over how much you need to save for retirement, as a rough rule of thumb, your pension pot should be 25x your target retirement income. For example, if your target annual retirement income is £50,000, you want to have a total retirement pot of £1,250,000.
The key is to make sure all the goals you’ve listed are measurable, realistic, and written down.
Set Your Course: The power of cashflow planning
This is where we create the plan. What available money do you have to realise your goals? Do you need more? How can you achieve more?
If you think you need more money, you need to figure out a way to increase your income or cut your outgoings – or a combination of both. This can require a bit of soul-searching, or you may see some easy wins.
For example, got a posh coffee habit? With a daily coffee and lunch coming in at, on average, £7.50 per day, if you did that five days a week for 52 weeks of the year, that’s £1,950 per year! Make a sandwich instead, and that’s a good chunk of cash you can put towards your goals!
Other options could be getting a second job, requesting a pay rise, reviewing your mortgage and utility bills, cancelling that gym membership you never use, or investing more wisely rather than your savings sitting in a low-interest account.
Whilst there is a lot of help and information out there about finances it is really important to understand the basics and take control, it’s equally as important to know when to seek help – you can’t be an expert at everything!
You could work with a professional financial adviser to help you at this point. Cashflow planning takes a look at all of your goals and models the various ways you can achieve those financial gains to give you a clear action plan. This could also include building up an investment portfolio or reviewing your pension. Whilst this may feel like a big step, research has shown that financial advice can leave non-affluent savers around £50,000 richer over 10 years*. That could make a significant material difference to your plans.
Review, rewrite, repeat
Now you have a plan, all you have to do is stick to it, right? Well, yes and no. Whatever your goals, you need to check back in from time to time to make sure everything is on track. Have your circumstances changed? Your priorities? Even your goals? Your plan should be fluid and needs reviewing at least once a year to check you’re still on course. This is even more significant now given the current cost of living increases here in the UK. Do you need to tweak the numbers at all to get a more realistic reflection of your current circumstances?
Consider Safety Nets
Sometimes, no amount of financial planning can mitigate circumstances that crop up outside of your control. That’s where having some safety nets in place really matters. The first step is to have a “rainy day fund” – that’s savings that you have easy access to in case an unexpected expense crops up. Beyond that, it is worth considering financial protection in the form of life or critical illness cover or income protection. It’s also very wise to ensure you have a current Will in place, should the worst happen.
You’re On Your Way!
There’s not enough space here to go into every aspect of financial literacy. The world of investing, for example, is a topic in its own right! The important thing is to begin to build your knowledge, to be self-aware about your personal journey, be curious, and know when to ask for help. Now you’re becoming more financially literate, make sure you speak to family members about their plans for the future, do they have goals in place? Have they thought about what their retirement will look like? Whether they are older or younger relatives, if they have taken little interest in their finances to date, there are bound to be some simple steps they can take now to improve life for their future selves.
So, now you have a bit of an action plan to follow, what are you going to do today to improve your plans for your own financial future?
By Julie Hunt
About the author
Julie Hunt has over 25 years’ experience working in the financial services industry. For the past 19 years, she has been running Face to Face Finance, a successful independent financial advice firm based in Norfolk, UK. Julie also hosts The Money Compass podcast and A thriving online community and is the bestselling author of The Money Compass: An Insider’s Guide to Financial Success.
*Source: https://www.unbiased.co.uk/news/financial-adviser/financial-advice-value-over-10-years
