Stumbling blindly along a path to nowhere…

The one thing that I learnt was that it is my plan, not my neighbours and not the world around me. It is about me and my family.

The pressure to conform in society is overwhelming especially at a young age and there appears some inbuilt expectations:

  1. According to the BBC 49% of young people in England are likely to enter higher education (although this is disputed by Charlie Ball, Deputy Director of Research at the Higher Education Careers Services Unit). Going back to the sixties this was 12% (according to the Guardian). These levels are expected to rise, and young people are under the illusion that to succeed university is the only option. But according to the BBC the average student will leave university with debts of £44,035
  2. According to the English Housing Survey Report 2013 – 2014, 48% of households aged 25 – 34 rent privately. What we don’t know is how many want to buy, but what we do know is that the pressure to own is immense. We all expect to own our own house at some point in the future. The cost of the average house in the UK according to the Office of National Statistics is £250,000
  3. According a survey by AEGON 14% of 25 – 34 year olds expect to retire at 60 and 35% at 65. This is despite the fact that the state pension won’t start paying until age 68 by the time they retire. A survey by the Lolly showed most people would be happy with a pension of £20,000 annually. Without inflation this would need a fund of about £300,000

We could go on; the average person spends £1,024 on holidays a year (according to breakingtravelnews.com), £3,500 a year on a car (webuyanycar.com) etc…

And just to add to the mix the Office of National Statistics states the average earnings in the UK are £26,500 with many jobs closer to being in the region of £13,124 to £16,640.

By the simple laws of maths things don’t stack up and yet we are under so much pressure to ‘have it all’, it has to be doomed to failure!

Financial Plans

In the UK, and perhaps other places, we come about things the wrong way. We have a tendency to jump straight to the solution – I need to save…let’s buy an ISA. The problem is that if we have no specific goal in mind then it is highly likely it will end up being a disappointment.

In a recent interview with Carl Richards (http://www.behaviorgap.com/) it dawned on me how important the whole planning process is and how without it, everything can seem overwhelming. I asked him about younger people and how they could engage with the process. He explained that good financial planning is all about trade-offs, and this made me think.

A good financial plan is about balancing the demands for today with the plan for the future.

But where do we start?

Let’s not conform

This exercise is as much for the young as the old.

The first thing is to work out is what we value; Carl calls this the discovery meeting and although it sounds easy it is a lot harder then we may think.

The basic idea is that the values will help us identify our goals. Spending more time with the family, paying off the mortgage and having a fund for a secure retirement may be seen as goals. But what does it all mean, what does it mean to spend more time with family? And should we consider periods of unemployment etc.

It is about drawing up a list of things we would like to do. In tandem with this we need to work out our budget – our incomings and outgoings! No point having goals if we can’t afford them or we are focusing on other things.

Once we have that we can draw up our plan.

The one thing that I learnt was that it is my plan, not my neighbours and not the world around me. It is about me and my family.

Plans are normally split into three areas:

  1. Short term – these are things we need to save for over the next 12 months, a good example is a holiday, but can include other things like home improvements
  2. Medium term – these are things we need to save for over the next 5 years, a good example could be an extension to the house, a car, and a fund in case of redundancy
  3. Long term – these are things we are saving for a period of five years plus. This could be paying off the mortgage, saving for retirement etc

And one final thought is that we always need to go back and review the plan because it can change, and should change with our individual circumstances.

So what next

Once we know the plan and how much it will cost, we can then work out the best solution to deliver on that plan.

Take two examples; an instant access cash account is likely to be the best solution for any short term plans whereas planning for retirement would likely require different solutions.

Taking the last point, it is assumed when it comes to planning for retirement that the best solution is a pension plan. There are good reasons for this, tax relief on contributions and the more flexible pension rules also make it a valuable inheritance tax planning vehicle. However, the income is taxed so looking for solutions where income is not taxed would be a useful blend.

For example, a stocks and shares ISA doesn’t provide tax relief on contributions but the income is tax free. There are potentially other examples and therefore it is about delivering the best solutions to achieve the goal.

Once we have the solutions we can then direct our money into these.

But what about the investments

For any solution the investment is key but more so for the long term plans. One good piece of advice we were told, was not to focus on the return but to focus on the plan. If we take a successful IPO which has returned 1000% plus we may be seduced into thinking all IPOS will do the same – the reality is that many don’t.

The key to investing is to build a portfolio of assets which have the potential to deliver the goals that you are looking to achieve. Diversifying assets across sectors, regions and asset classes is the best way to achieve the goal. But rather than just picking the best performers, the most advertised, research must be done because investments do different things at different times.

And finally

A plan is our map and means we can follow the right path, as long as we keep going back to it and we accept things change or we might make mistakes then we shouldn’t have to stumble blindly along it!

NOTE: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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