Your finances and what you want from them can be dramatically altered by a change of circumstances, whether good or bad. From unemployment to parenthood, life events can pose new challenges when it comes to managing your money.
David Gow, a director at Acumen Financial Planning, gives some advice on ten financial life events.
1. Leaving the nest
Leaving home is a huge milestone in anyone’s life – and brings many responsibilities, including managing household expenses. Not creating a budget is the most common mistake people make in managing their money. Putting together at least a basic record of how much you’re earning and where it’s going is the first and most important step in assuring financial security.
2. Promotions and bonuses
As you climb the career ladder, your bank balance should benefit. Try to resist the temptation to blow a pay rise on material possessions; rather, plan ahead for your future. The earlier you start saving for your retirement, the easier it will be thanks to the wonder of compounding – receiving investment returns on returns already made.
3. Getting married
Getting married is not only a big commitment but marriage ceremonies alone can cost a considerable amount. Money can be a big source of conflict within relationships, so talk openly and frankly with your partner to ensure that you’re on the same page when it comes to financial planning.
4. Having a baby
The pitter-patter of tiny feet often leads to great changes in working patterns and lifestyle. You or your partner might become a stay-at-home parent, and that often means sacrificing spending on things like luxury items and holidays. At this life-changing moment, you might want to start saving for your child’s school fees or university education. Tailor your investment strategy to each goal and timeframe, as well as your attitude to risk. Saving for school fees over a five-year period generally requires a more cautious approach than planning for retirement in 40 years’ time.
5. Paying down debt
For the vast majority of us, debt is a fact of life: most homeowners have a mortgage. Unsecured debt is another issue. The best way to deal with credit card debt is to avoid getting into it in the first place. A simple strategy will help you to pay down debt and amass wealth: pay yourself first every time you earn money. Basically, this means saving 10% of your income first, living on 70% and using 20% to repay debt.
6. Losing your job
Jobs are less secure than they have been in recent memory. Do you have adequate unemployment insurance or any other financial cushion to help protect your household in the event of being losing your job? If you don’t have an emergency fund, start building one.
7. Falling ill
With the appropriate protection in place, you’ll have the comfort of knowing that you and your family are financially protected against premature death and critical illness. Life assurance, critical illness or income protection could form part of your protection. Private health provision is also becoming more popular.
8. Taking a different path
Do you find your job fulfilling or do you dream of doing something different? Would you like to start your own business, have more time for your hobbies, write a book or move abroad? Think long and hard about lifetime goals and define them. Then talk to the significant people in your life about how and when you could achieve this. Where there is a will, there is often a way.
9. Winning big
The odds might be slim, but if you play the National Lottery there’s always the chance of winning big. Fools and their money are soon parted, no matter how big the win, so think sensibly about how to spend the cash. Cashflow models used by independent financial planners can help you develop a strategy to ensure your money doesn’t run out during your lifetime.
10. Reaching retirement
Turning your retirement savings into an income for life is one of the biggest financial decisions you’ll make. Once you’ve locked into an annuity, there’s not much flexibility. With many people nowadays going into “phased” retirement, it could make sense to phase your annuity purchase or bypass annuities altogether, leave your fund invested and draw an income from it, provided it’s appropriate for your means and circumstances. The forthcoming changes to pension legislation this year will provide increased opportunities for many. Determining your strategy for withdrawing money from your retirement savings is a major decision that should be made with a firm grasp of your income needs and options.
David Gow is director at Acumen Financial Planning and is based in their Edinburgh Office.