The Importance Of Financial Planning

Making plans is in my nature. I know this because of my devotion to the Google calendar, my habitual earliness and the satisfaction I feel when ticking off an item on my To Do list. I am always looking ahead and planning for what is coming next and there is no area of your life in which this is more important than with your money. But where do you start? What financial issues should you prioritise? Which financial fire should you fight first? Understanding your financial needs will help you make smart decisions with your money, achieve your goals and avoid forking out your hard-earned cash on products you don’t need. Here is how to do it.

Consider your goals – Aim to create a vision of various stages of your life and make goals which align to it. You should ideally have a Right Now plan, addressing your financial needs and budget as they stand today, a Next Up plan, for what is coming up next including things like clearing debt or raising a family, and a Long Term plan, for later on in life including your plans for retirement. Your plans need to be flexible, realistic and unique to you. Consider your needs in each of the following areas, in the following order:

1. Income to cover your expenses right now.
2. Protection in the event that you die or become seriously ill.
3. An emergency fund or income protection plan in case you are out of work (especially if you are self-employed).
4. Saving for retirement (yes, even if you are young).
5. Saving for specific future wants and needs.
6. Investment.

When thinking about each area, think about what provisions you already have in place and address the gaps, with 1. being the highest priority where you should direct your attention first, and 6. being the last.

Consider your worst case scenario – You need to ask yourself some difficult questions. For example, do you have enough savings in your own name and sufficient earning power in case your relationship was to break down? Do you have a rainy-day fund or a secondary income stream which would cover your expenses if you lost your job? Do you have sufficient life assurance in place to take care of your children if something happened to you? If your answer to any of these questions is no, your Right Now plan needs to address it and you must never assume it won’t happen to you. It is one of life’s realities that things go wrong and you need to make allowances for that.

Plan to enjoy yourself – I have talked before about the minimalism movement and very disciplined people out there who practice ‘no spend’ days, months and even years. While I have great respect for these people, I know that it is not realistic for many people. You can be frugal and your indulgences do not have to be extravagant, but a little bit of what you love is so good for you. Saving and planning for the future is really important, but you are alive today and your financial plans should empower you to enjoy it. For example, your Long Term plan should not restrict you to such an extent that you can’t include your desire to take a summer holiday in your Right Now plan. One thing that you can know for sure is that you are not going to live forever and you deserve to enjoy your money now, rather than save every penny for some imaginary day when you will one day smash open your piggy bank and start living. Plan your splurges and savour them; you work really hard for the privilege of doing so.

 

The purpose of this feature is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. 


Are You Saving Enough For Retirement?

There is increasing pressure on the government to provide the state pension to a population which is living longer and, at around a quarter of the national average earnings level, it is simply not enough to fund retirement beyond the most basic of needs. Auto-enrolment for workplace schemes has increased pension saving generally, but it is only mandatory if the employee is earning at least £10,000 per year, and most schemes fall short of what is required to save adequately for retirement. Women in particular are simply not saving enough. Women lag behind in earnings and, consequently, pension savings. We are more likely than men to work part-time and to take career breaks, meaning that many end up with less than anticipated in their pension pot when it is time to retire.

It would not be overstating it to call this a crisis. This means you have to take responsibility for saving into your own hands. I will explain how you can protect yourself from pension pitfalls and help you enjoy a retirement free from money worries.

Assess your current plan – Find out what you are currently saving, what your employer is contributing (if applicable) and see if they can provide you with a statement or, even better, a forecast. Educate yourself about how your scheme works as your starting point.

Work out how much you need – Scottish Widows reckons that most people need to save 12% of their annual income to save adequately for retirement. It is arguable that you will need less income in retirement than during your working life. You will hopefully have managed to buy a house and clear the mortgage and most people will have paid off other debts they had earlier on. However, you must ask yourself if this really rings true for you. Your retirement is your reward at the end of your career and many people envisage taking lots of holidays, living in a comfortable home and perhaps helping children and grandchildren with education costs or to get onto the property ladder. You need to aim for a retirement income which will match your desired lifestyle.

Start early – Saving early will allow you to benefit from compound interest and maximise the growth of your fund. This is especially important if you plan to take time off later on, perhaps to start a family. Saving an additional 2% of your income per year in your 20s could offset a six year career break in your 30s.

Ensure you will qualify for the state pension – You need to make national insurance contributions for 35 years to be eligible for the full state pension. You can make voluntary contributions if you are not working and child benefit gives you national insurance credit for every year you receive it. Some high earners do not claim child benefit due to the tax charge that comes with it, but you can register for it and then opt out and still qualify for the national insurance credit if this applies to you.

Seek advice – The Pensions Advisory Service is a free, impartial service available to anyone who wants information about pensions. If you have a final salary pension and want to save more, are self-employed or are approaching retirement and are unsure of your options, you would be wise to speak to a financial adviser to work out your best option.

 

The purpose of this feature is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. 


How To Buy Your First Home In Five Easy Steps

You have money saved, a polished credit score, and a code-red addiction to home renovation programmes. You are ready to settle into home-ownership. Where do you start? What questions do you ask and to whom? We are going back to basics: once you’ve decided to buy, how on earth do you go about it?

Step 1. Work out how much you have to spend.

Before you act on your first instinct to rush out to view your dream house, you must first establish your budget. If you are unsure how much you can spend, you will quickly be deemed a time-waster by estate agents as this will be their first question.

There are two things to consider here: how much will your mortgage provider lend you, and how much is your deposit, making reasonable allowances for the other costs associated with buying a property.

To find out how much you can borrow, you need to get an Agreement in Principle.

Your mortgage adviser will answer questions about your income and expenditure, so it is a good idea to have accurate figures of how much you earn and any outstanding debt you owe, including balances on credit cards and overdrafts. You will undergo a ‘soft’ credit search, which means the lender checks you out but the search will not negatively impact your credit score.

The provider will then give you an Agreement in Principle, showing the maximum they would be willing to lend you based on what you have told them. It will also tell you the size of deposit they need, as a percentage of your purchase price. It will not tell you what interest rate, term or repayment type your mortgage will be. You will find this out later, as well as how much your monthly payments will be.

You will need to set aside money for:
• Solicitor fees – up to around £1500
• Stamp duty for properties valued at £125,000 or more (though you may not have to pay anything if you are a first time buyer)
• Removal firm fees – around £500
• Valuation/Survey fees – Mortgage providers will insist on a basic valuation survey and the cost will depend on how much the property is worth. You may also want to get additional surveys which will have their own fees.
• Mortgages sometimes have an arrangement fee
• You may want to set aside money to renovate/decorate your home when you move in.

Now, once you have taken all those costs into account, you can use your remaining cash as a deposit. Most lenders will insist on a 10% deposit, and will give you a mortgage for the remaining 90%. However, you may need a larger percentage if your credit score is in poor shape.

For example, if you have £12,000 to use for your deposit, and the lender agrees to fund a 90% mortgage of £108,000, you could purchase a property costing £120,000. However, if your credit score is poor, the lender may view your mortgage as a bigger risk, and could offer, say, an 80% mortgage of £60,000, meaning your maximum purchase price will be £72,000. Your income will not change how the lender views this. In other words, even if you earn loads of money and feel you could afford to borrow more, your credit score will determine the percentage of the purchase price that they will offer you.

Step 2. Go house-hunting and make an offer

Hopefully you will find the house of your dreams during this stage, and once you do, it will be time to make an offer. You make your offer through the estate agent handling the sale, and wait for them to speak with the vendor (seller) to see if they will accept it. Other hopefuls may come in with counter-offers, and you can get into a bidding war. This is why your budget is so important – do not bid more than you can afford.

There are no hard and fast rules on how much to offer, and the best move largely depends on the individual circumstances and the climate of the housing market. Generally speaking though, estate agents will spot someone who thinks they’re bidding cleverly in an attempt to get a lower price at 100 paces and they will not appreciate it.

Step 3. Sort out your mortgage and conveyancing (legal work)

Yay! Your offer is accepted and you are eager to get the ball rolling.

You will need to hire a solicitor to do their bits and bobs in the background – more on them later. Now is also the time to go back to your adviser and tell them you have found a property.

You will go through a more comprehensive interview about your income and expenditure, and will undergo a full credit check. You will have to provide documents to support what you have told the adviser, and they may contact your employer. Do not panic if this happens, it is not unusual and the employer is asked to fill in a standard form about your income. The lender will check you out as a borrower first to make sure they are happy to lend to you and only then will they look at the property with a survey. This part of the process can be lengthy. You can keep waiting to a minimum by providing as much information and supporting documents as possible at your interview, and by arranging to stay in regular contact with your adviser. Your adviser is also the person to ask about arranging insurance. You will need buildings cover as a condition of the mortgage, and you may benefit from additional protection products as well.

Lenders will arrange the survey (though you will choose which kind you want and you will pay for it), and it will usually take a few days for the report to come back. If the report is ok and the property has been valued the same as the purchase price, the mortgage will be ready to go.

Step 4. Sign your contract and pay your deposit

You have your mortgage offer which is your green light that the mortgage is ready to go – the hardest part is over.

Provided your solicitor has finished doing their various searches, and the vendor is ready, you will now pay your deposit and exchange contracts. You pay the deposit to your solicitor by cheque, though this is frequently done via transfer or CHAPS payment nowadays as it transfers the money the same day. You can do this at one of your bank’s local branches.

When you sign your contract, you have passed the point of no return – you are committed to buy the property. For this reason it is a good idea to have your buildings cover (and other insurances you need) in place from the day you sign.

Step 5. Wait for your completion date, and then collect your keys

You will have agreed a completion date (the day the property becomes yours) when signing the contract. The solicitor will contact your lender to request the mortgage funds. They usually ask for the money to be sent the day before your completion date. It is a good idea to give your lender a ring to make sure they have done this. You can make arrangements for your ‘moving in’ day, and wait for the joyous call from the estate agent letting you know you can go to them to collect your keys. Congratulations – you are officially a homeowner!

 

 

The purpose of this feature is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.