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  • 19 Oct 2010 10:08 AM | Keith Churchouse

    It is nearly 10 years since the demise of what was declared the ‘oldest mutual organisation in the world’, first formed in 1762. And in a variation to many of the ‘Henry’ clients portrayed in the television adverts, it turned out not to be such an Equitable Life after all. Sadly, it is estimated that some 50,000 policyholders have died waiting for any form of compensation to be paid since 2000(Source/Report: Daily Mail, July 2010).

    Finally, this week, it is reported that the details of a £1.5 billion compensation package will be announced and finalised by the Coalition Government after nearly a decade of delays, enquiries, arguments and disagreements, including investigations by the Parliamentary Ombudsman. This is way short of the £6.0 billion package that many felt was required. Although this announcement will be a momentous occasion in itself, I am not sure it will make the top headlines it deserves because it will come in the Comprehensive Spending Review that will have many other (mainly negative) headlines of its own. Wednesday the 20th October 2010 will be a day of history whatever happens.

    And what now for the policyholders? Bearing in mind that the with-profits fund at the end of 2000 had an estimated value of around £26 billion (source: Wikipedia), you might see that the proposed £1.5 billion in the big picture may not spread very far, although admittedly something is better than nothing! I understand that they may start to provide compensation to those who have or are suffering ‘hardship’ and this might, as an example, include those that took out a with profits annuity which has seen the income first projected fall away over the years. Others who have not suffered any ‘hardship’ but seen their investment bond, pension (executive pensions/ Section 32/retirement annuity) or income drawdown go down in value may find themselves lower down the pecking order of compensation payments. I have no doubt that the devil will be in the detail on this one, but I believe that the principal of priority list is correct.

    We are likely to know after Wednesday. I am only sad that it has taken so long to get this far.

    Whatever the outcome of the Equitable Life compensation scheme and its subsequent effects, it is always worth seeking independent financial advice (IFA) to ensure that you are getting the best from your financial planning.

    This article should not be treated as individual advice. Individual advice is only available based on your individual circumstances. Further information, advice and contact details are available at our websites, www.churchouse.com or www.planmypension.co.uk

    Keith Churchouse, Chartered Financial Planner
    Director of Churchouse Financial Planning Limited

    Churchouse Financial Planning Limited is authorised and regulated by the Financial Services Authority.
    www.planmypension.co.uk
    is a trading name/style of Churchouse Financial Planning Limited.

     

  • 30 Sep 2010 1:05 PM | Dan Woodruff
    Debt is a fact of life for most people. However, paying your debt on time should not be seen as financial maturity. You really should work towards being debt-free as quickly as is possible. Don’t forget that we class debt as someone else’s asset, so by continuing to owe money, you are actually feathering someone else’s nest rather than your own.

    Your debts are someone else’s assets
    Debt may be a necessity for most of us, mainly to buy a home, but the interest repayments are hampering your ability to save towards your financial goals. The sooner you can be debt-free, the sooner you can work towards your financial independence.
    The company that loaned you money wants a steady income from your debt, so it is often not in their interests to help you to repay the debt sooner. Nevertheless, you can usually may extra payments towards debts, which will help you to pay the capital owed off sooner.

    Compound interest
    If you save £100 and add interest of 10% on this, after 1 year you will have £110. If in year 2 you add another 10% interest, you will have £121. Thus, your interest will be earning interest. This is compound interest in action. With debts this force of nature is working in someone else’s favour, not yours, so you need to reduce the power of the compound interest as quickly as you can afford to.

    Some debts are more expensive than others
    It goes without saying that this is true. In general, the less risky you are as a borrower, the cheaper the debt will be, and if the debt is secured against an asset, then this makes it even safer, and therefore cheaper.

    The downside is that you lose control over your asset. To give you an example, you do not own a mortgaged house - your mortgage company does (which is why some hold the deeds). It only becomes fully your asset once the loan is repaid.

    In general, mortgages are fairly cheap in percentage terms, personal loans are more expensive, and credit cards are even more expensive. However, you need to take into account the term of the loan, as you can end up paying more in the long run with a cheaper long-term loan than an expensive short-term loan. This is the power of compound interest.

    Making minimum repayments
    It is common, especially with credit cards, for a provider to insist that you make minimum debt repayments. It can seem attractive to simply make these repayments because they keep your outgoings low. However, in the long run this will make you pay more interest.

    For example, it is typical for a credit card to require repayments of 2% to 3% per year. This payment would result in only a small proportion of the debt being repaid, the majority being interest. This can mean that you would take many years to clear the debt. When you consider the very high interest rates on credit cards, this can mean thousands of pounds in extra interest.

    The effect of overpaying
    If you can overpay on your debt, even by a small amount each month, this can reverse the effect of compound interest. The overpayment (if allowed by your contract), will reduce the balance quicker, leading to less interest being paid.

    You should always bear in mind that your debts may have penalties to redeem the balance. We advise that you examine your contract carefully!
    Also, different contracts will calculate interest in different ways, so you need to be careful in your calculations. Each loan will give a comparative indicator, called the APR (annual percentage rate). This will give a percentage annual rate based on the total charges for the scheme.

    Which debt to repay first?
    The general advice is to pay the minimum allowable on each debt, and then to combine all your remaining resources into the repayment of one debt at a time, to repay this as quickly as possible. Normally, we would recommend that you repay the debt with the greatest interest first.

    Some examples
    In these examples we have assumed that interest is applied monthly and there is no penalty for making regular overpayments.

    Credit card balance: £5,000
    Interest rate: 25%
    Minimum repayment: 2.5%
    Monthly repayment: £125.00
    Total interest: £5,862.28
    Total repaid: £10,862.28
    Paid off in: 7 years and 3 months

    Example 1
    Extra monthly repayment: £25.00
    Interest saved: £2,236.78
    Paid off: 2 years 5 months early

    Example 2
    Extra monthly repayment: £125.00
    Interest saved: £4,326.86
    Paid off: 5 years early

    Equivalent tax-free growth
    If you were to calculate the amount your overpayments would have to grow by each year to generate the interest saved, this equates to a tax-free growth figure. In the case of example 2, this equates to a growth of 57%. There are few ‘investments’ that could promise this level of ‘growth’.

    Dan Woodruff is an Independent Financial Adviser and Certified Financial Planner with Woodruff Financial Planning, based in Colchester, Essex. Click here to read about financial planning or investment management.
  • 21 Sep 2010 5:27 AM | Dan Woodruff
    Many people forget about protection in their financial plan, partly because they do not wish to face such issues, and partly because protection does not necessarily advance their goals. However, we see this as a vital foundation for your future financial prosperity, because if something goes wrong this can be devastating on your future financial stability.  At best, this can take time to recover; at worst, it can completely derail your financial plans.

    What is family protection?
    This part of your plan should examine the likely effects on your finances is some sort of disaster happens to the family. Usually, this means protecting the family against the effects of the death or serious illness of one of the breadwinners.

    This needs to be balanced because family protection will be an expenditure (which could otherwise go towards your goals), but ultimately your plan should aim to provide a safety net should the worst happen.

    The main risks
    These will focus around:

    Death of a breadwinner
    If someone within the family dies, most people would want security for their family’s home, so paying off debt should be a major priority.  However, the future needs of the family should also be considered.  For example, if one member of a couple dies, how will the child care arrangements be addressed?  Some families may need child care to be paid for, thus allowing the surviving partner to work.  If so, an ongoing income may be required.

    Illness of a breadwinner
    This can be extremely debilitating.  Imagine how you would cope if one of the breadwinners became too ill to work for an extended period.  How would this affect your income?  Of course, with a reduced income, this could ultimately affect your ability to meet your goals.

    Unemployment
    Another risk is that a breadwinner is made redundant. Again, think about how your family would cope if an income stops.

    Possible solutions
    The following methods may be used to protect your family against the main disasters:

    Emergency fund
    The basic protection should be a fund to cover the main family expenses for 3-6 months, which should be available in an instant access account.  This should tide you over through most short-term problems.  Don't spend your life chasing the best rate, just find a convenient account.

    Life assurance
    This is a form of insurance which pays out a lump sum in the event of the death of a breadwinner.  Many people use this to cover their mortgage, but you can also use it to provide a fund for future family income.

    Family income benefit
    This is a form of life assurance which pays out an income in the event of the death of a breadwinner.  The income would be paid for a specific term, perhaps until the children are old enough to leave home.

    Critical illness cover
    This is a form of insurance which pays out a lump sum in the event of a serious named illness of a specified severity.  This can be used to provide cover against debts, for income, or to provide a lump sum to make alterations to the home in the event of disability.

    Income protection
    This is a contract which pays out an income after an initial period for as long as the insured is too sick to return to their former work.  Thus, an income can be replaced while you are too ill to work, but will cease when you are well enough to return.

    Unemployment cover
    Employed people can cover their major expenses for a limited period (say 12 months), if they are made redundant by their employer.

    Private medical insurance
    You can provide cover for non-emergency operations through private healthcare.  This can mean that you are seen more quickly than on the NHS, which could mean a quicker recovery; this might be particularly useful for the self-employed.

    Other areas to consider
    Wills
    Everyone should have a will as this ensures that you will know how your assets are distributed on your death. Most people do not have a will, and many are not regularly updated to take account of changing circumstances.  The only way to be sure of providing for your family is to make a will with a qualified professional.

    Lasting powers of attorney
    This is a legal document which allows a trusted person to take control of your finances if you are incapacitated for some reason.  This could mean mental illness, but could also be something like a serious car accident, which puts you in a coma.

    Business agreements
    If you own a business you should think about making plans for succession and how your assets are treated in the event of serious illness or death.

    Next steps
    Find out what levels of cover you may already have in place.  This may be personal insurance policies, cover through work like death in service, or sickpay arrangements, plus lump sums from pensions etc.

    If you need more information on financial protection for your family, orfinancial planning or investment management, visit our website at www.woodruff-fp.co.uk.
  • 14 Sep 2010 10:19 AM | Dan Woodruff

    Over time, we all build up assets as well as liabilities (debts).  The general purpose of your financial plan should be to build up enough assets so that you can choose to live off them, to be able to fund your desired lifestyle, whatever that may be. In simple terms, your assets will be offset by your liabilities, but it can me more complicated than that.

    Why measure your assets and liabilities?
    Put simply, your assets can help you to achieve your future financial goals, and your liabilities will hold you back. Assets can help you grow your income, and liabilities will grow your expenditure.  Not only that, but your liabilities could also hold back your ability to grow your future assets, and thereby affect your future income!

    What are your assets?
    You should be able to list all your assets.  This would include the following, but could be anything of value:
    • Property
    • Pensions
    • Investments
    • Bank accounts
    • Businesses
    Therefore, it should be relatively easy for you to estimate how much each of these categories are worth.

    Good assets and bad assets
    This is where a lot of people fall down in their planning.  You need to think about how your assets affect the rest of your financial life.

    Your house
    When we ask most people what is their biggest asset, what do you think is their response?  You would probably say your house.  Well, as far as we are concerned, your house is your biggest liability.

    OK, we realise that a house is an asset in the traditional sense, but it is also a huge drain on your resources.  Think about it for a minute.  If you have a mortgage, where do you think your bank puts your mortgage/house? That’s right, in their assets.  That makes it a liability for you.  Also, if you want to cash in that asset, where will you live?  Well, you will need to buy another house, so it doesn’t really count for financial planning purposes.  Of course, if you downsize you could release some equity, but how many people actually choose to do this?  Along with a house comes a lot of expenditure - council tax, mortgage, utilities, maintenance etc.

    Your pensions
    Another big asset for many people are their pension funds.  The trouble with pensions is that the Government tells you what you can and cannot do with them.  You cannot take benefits until at least age 55, and only 25% can be taken back from the fund; the rest buys and income.  For some people this inflexibility means that pensions are not as desirable as other asset types.  Of course, pensions do have a place in your plan, with excellent benefits such as tax relief.

    Your business
    Your business may have a value (although how much does depend on what someone else may be prepared to pay for it).  However, it can be dangerous to assume that your business will grow at a uniform rate until you come to sell.  Your business may be worth a lot less than you think.  We prefer to think of businesses as cash generation tools for income, which can go towards creating more of the correct asset types below.

    Readily realisable, income producing assets
    These assets are the holy grail of financial planning. You need to work on building up assets which could be cashed in at any point and spent on your lifestyle. This gives them flexibility to be used when you might need them, and also diversifies away from less flexible assets as outlined above.

    If you then combine these assets with income generating capability, this will only serve to increase your future income, thus growing your future assets. This is the power of compound interest in action, working for your benefit. Good examples of such assets might be:
    • Rented investment property
    • Shares/ISAs/other investments
    • Bank accounts
    What are your liabilities?
    In modern times is virtually unheard of to be completely debt free, and indeed this can come with some problems. The trouble is that this affects your ability to grow enough assets (of the right type) to be able to fund your future lifestyle without having to work.

    Typical liabilities include mortgages, credit cards and loans.

    What to do about (bad) liabilities
    Our suggestion is that you should always aim to pay off debts as quickly as possible.  This will serve you well in the long term as the interest saved can be put towards your lifestyle now in the form of expenditure, or to building assets for your financial future.  Generally speaking, debt costs more than the gains from savings or investments.
    Remember that your liabilities are someone else’s assets.  The sooner you pay off your debts the better off you will be.

    'Good' liabilities
    In certain cases, it can be good to have debts.  If someone else is paying that debt (such as with a rental property) then this can be a good long term strategy towards capital growth.  However, this does come with risks so be careful to understand them.

    Next steps
    You should put together a list of all your assets, plus all your liabilities.  Then you can break these down into good and bad types, focusing on reducing debts, and increasing readily realisable income producing assets.

  • 10 Sep 2010 2:38 AM | Dan Woodruff

    One of the most vital parts of your financial plan is the relationship between your income and expenditure. Put simply, your income is what drives your lifestyle; your outgoings are what drains your lifestyle (although of course, they fund your everyday living).  This article should help you to understand this relationship.

    Why measure your income and expenditure?
    You should understand the relationship between the two elements so you can work out a plan to best use any excess income towards your financial goals.

    Ultimately, this is about analysing your income and expenditure, not necessarily making a budget.  Although, having a budget is probably a good place to start for most people, as it will be some sort of framework to work towards.

    Project into the future
    You should also think carefully about how your income and expenditure may change over time.  For example, you may hope for pay rises each year; your expenditure will also change as prices go up, and your circumstances change.

    Most people expect to retire one day.  You need to plan for how your income and expenditure will change at that point of your life.  Your income may be different: perhaps less from earned sources, and more from investments and pensions.  Your expenditure may be different: perhaps more on leisure and hopefully less on things like mortgages!

    Income - gross and net
    Most people, when asked will tell you what they earn in gross terms: ‘I earn £50,000 per year’.  This is true, but does not tell the whole story.  You need to understand the link between gross and net earnings. As far as we are concerned, tax is simply another cost you have to bear.  For example, the typical personal in a job on the salary mentioned will pay Income Tax & National Insurance.  Add to this other taxes such as VAT and Council Tax.

    The net amount received after tax for someone earning £50,000 pa might be around £36,000 (depending on the prevailing tax situation).  This is a cost to you of £14,000 per year (or 28% of your gross earnings).  So, to buy that £1,000 TV you actually need to earn £1,388.

    We’re not saying that tax is a bad thing.  After all we all need roads and hospitals.  However, thinking about how it affects our income certainly focuses the mind on our spending habits.

    Debt
    Many people spend a large proportion of their income on debt payments.  While this may be necessary, it is not desirable in the long-term.  If your debt payments are 25% of your gross income, you could be spending over half of your money (including your tax) before you even get a chance to buy essentials like food.

    Expenditure analysis
    If you take the time to work out what you actually spend your money on, it can be a sobering experience.  It is very easy to waste money on small purchases, but these soon mount up.  For example, if you spend £5 a day on your lunch, for 48 weeks of the year, this will cost you £1,200 per year.

    If you break down your expenditure you can soon start to work out what is necessary and what is not.  Then you can prioritise.

    Be realistic!
    We often see clients who are not honest with themselves when it comes to their spending.  If, when you analyse your income versus your spending, you find you have a larger surplus than expected, you are probably underestimating some of your spending habits.

    Aim to live within your means
    It sounds simple, but many if not most of us fail to live by this simple mantra.  But most people who have succeeded in becoming millionaires have lived by this all their life.  If you can spend less than you earn you can use the excess towards your financial goals.  The reverse, spending more than you earn can only lead to debt and disaster.
    So when you have analysed your spending, you should be able to see a clear picture of what resources you currently have to put towards achieving your goals.

    Conclusion
    Many people find that undertaking this exercise is actually quite motivating.  As you gain some control over their budget, you can start to feel some control over the rest of your life.  You may then find that you work harder on other areas of your financial life - perhaps to spend less, perhaps to earn more.

    Next steps
    You need to start with an analysis of your income situation.  List all your income sources, and then work out the difference between your pre and post tax income.  You should find this information in documents like your payslips.
    You can then analyse your income.  We have produced a handy form for this purpose, which should help you to be systematic in your approach, and not forget anything.

    Take your time to do this.  It will be hard work, but worth it.

    Want some help?
    We work closely with our clients to develop and maintain their financial plans.  If you would like some help in preparing your plan, please contact us.  We help our clients to plan for their financial future by analysing their fundamental needs rather than by selling products.  See http://www.woodruff-fp.co.uk for more information.
  • 09 Sep 2010 10:34 AM | Keith Churchouse

    With the new coalition Government now settling into their stride, there seems to be many changes ahead that will affect many individuals and businesses as we move into the Autumn months of 2010 and into 2011. Financial Planning is no different and, as an example,  you may have seen the maximum retirement age to which pension benefits can be drawn has increased to age 77 from age 75, with a current consultation in progress to review this further, with the details to be announced in April 2011. You may remember that at the beginning of this tax year we saw the minimum retirement age also increase from 50 to age 55.

    Another issue is the changing of regulatory power with the Financial Services Authority (FSA) and the proposal that the Bank of England will soon take over some of their responsibilities.

    One additional example of proposed change is the proposals for increses in pensions, detailed below.

    Increases in pensions reduced to CPI from RPI

    Some readers will have also seen that the Government is proposing that pension increases in the future will be based on the Consumer Prices Index (CPI) rather than the current arrangement, based on the Retail Price Index (RPI). For many concerned about the effects of inflation on the purchasing power of their money, action may be required and some will consider how to mitigate the effects of these changes and the effects of inflation increases.

    Although not guaranteed, it has been common practice in the past for Bank of England base rates to be used as the tool of choice to control inflation. As you will see from the rate decision in September 2010, these are still on hold.

    However, if this was employed in the future, with its current level of 0.5%, we could see the Bank of England’s base rate increase in future times.

    As always, then seek Independent Financial Advice (IFA). This is not designed to provide individual advice.

    Keith Churchouse

    Director, Churchouse Financial Planning Limited
    Churchouse Financial Planning Limited is Authorised and Regulated by the Financial Services Authority

  • 07 Sep 2010 7:40 AM | Dan Woodruff

    Your financial plan is designed to project into the future, so you need to think about how that future will pan out.  With this in mind, you need to make certain assumptions about how certain things will change over time (inflation, investments, expenses etc).  This article describes the areas you should consider, and why they are important.

    Why are assumptions important?
    We all know that life moves on, and prices never stay the same.  You therefore need to take account of changes to things like inflation because otherwise your plan will not be accurate.

    Be cautious
    It is better to be cautious and underestimate things (thus having more than is needed in the future).  The alternative would be to overestimate effects, which could leave you with less than planned, or having to take more risk.

    You should also think about how things have changed in the past over the long-term, rather than what is happening at the moment, as this might be outside the general norm.

    Assumptions to consider
    Inflation
    Think about the price of goods 10 years ago.  How far would £100 have gone then, compared to now? Generally, prices increase over time, so you should factor this into your calculations.  This is important because £100 saved now won’t be much good in 20 years time.  Also, if you want to provide an income for the future in today’s terms, you need to work out what £20,000 now will be in 20 years time. See the Retail Prices Index in the UK.
     
    Earnings
    You may base your future ability to plan on your earning capacity.  If you overestimate this you might not get back as much as you thought.  See the National Earnings Index in the UK.

    Expenses
    Your earnings will probably rise, but so will your expenses.  Don’t forget to factor this into your plan. Of course, some expenses will have a finite period -for example your mortgage will hopefully be paid off in the future.

    Investment returns
    Different assets perform differently.  You therefore need to assume that they will grow at different levels. For example, you can expect cash to grow differently to shares, and differently to property. You also need to think about the growth of the underlying assets (the capital), and the income returns.  For example, bank accounts have zero capital growth, and low income returns.

    Charges & interest rates
    Don’t forget to include product charges into your calculations as these will reduce the value of your savings over time. You should also consider future changes to interest rates on your borrowings.

    Attitudes to consider
    Your general attitudes towards your goals will affect how you approach solutions to your goals.  We concern ourselves with monitoring future risks to your financial well being.  Here are some important factors to consider:

    Investment risk
    Generally, risk is linked to reward over time.  On average, over time, the greater risk you take with your money, the greater return you should hope to make.  But this comes at a cost of short-term fluctuations, which can risk you losing capital.

    You should think about how much risk you are prepared to take with specific aspects of your finances.  For example, you should probably take no risk with your emergency funds, whereas you might be prepared to take more risk with longer term savings like pensions, which you could make up at a later date.

    Mortality and morbidity risk
    This measures the risk to you or your family of financial loss due to death or ill health.  We can measure the likelihood of these events happening using statistical evidence.  You should also consider your attitudes towards these risks.  Are you concerned about the risk to your family’s lifestyle should you or your partner die, or be unable to work due to illness? Think about the likely effects of these events, and the impact on your lifestyle.  If you have assets to enable you to weather the storm you may not be concerned.  However, if not, you may wish to consider insurance to cover these issues.

    Next steps
    Work out your estimates for future financial change in important indicators such as inflation and earnings.  This will have an important bearing on your future plans.

    Measure your risk tolerance.  This should be your first step in understanding your attitudes towards investment risks. Don’t forget to test both you and your partner if you are a couple.

    You may also wish to consider the financial loss to your family if you or your partner dies or gets too ill to work.  This may affect your future ability to achieve your financial goals.

    Want some help?
    We work closely with our clients to develop and maintain their financial plans.  If you would like some help in preparing your plan, please visit our financial planning website.
  • 27 Aug 2010 5:57 AM | Dan Woodruff
    When we first talk to business owners about financial planning they usually reply: ‘My business is my pension.’  Equally this applies to many employees - ‘My house is my pension...’ This is a poor place to start with your financial planning, and may leave you far short of your ultimate goals.

    Why your business is not your pension!
    OK, your business might prove to be your pension, but it might not.  By saying that it will provide you with a future income you are leaving your retirement plans in the lap of the Gods.

    By saying that your business will provide you with an income, what you are really saying is that you will sell up in the future, and someone will come in and give you enough money to retire on.

    Will you be able to sell your business?
    Any asset is only worth as much as what someone else is prepared to pay for it.  You might not actually have a business that someone wants to pay for.

    We meet many business owners who are actually just self-employed consultants.  They have swapped the employee life for self-employment, but the business would not run without them. With this in mind, without them there is probably no business, so who would pay for that?

    The best kind of business runs without the owner.  Financial planning is about getting to financial independence - i.e. being able to survive without the income from the business.  If you run your finances well, you can eventually become an investor.  This means you rely on your money to do the work, not you.  If you do this well enough, you can choose not to work, and live off your independent income.

    How much do you actually need?
    You should first work out what you need to be able to fund your future lifestyle, and work backwards from there.  If you know how much you need you can build a plan to achieve that worth for your business, and more importantly build the business in such a way that someone else will be prepared to buy it.
    You could work closely with other business advisers such as an accountant or business coach to plan for your exit strategy.

    Think of your business as a cash generation tool
    You should be able to earn income from your business, either as salary or dividends.  Hopefully you can also sell it at a later date for a lump sum.  These streams of cash should be used towards your ultimate aim of independence.

    Don’t forget tax!
    When you sell your business you will need to pay capital gains tax at 10% or greater.

    Why your house is not your pension!
    You may be able to use your house to supplement your future income.  However, in my experience this is rarely desirable for most people.

    Downsizing?
    You could choose to downsize, but who wants to work hard all their life to get the house of their dreams, to then sell up to someone else so you can live more easily?

    Equity release?
    You could choose to release equity from your home through a complex mortgage product.  However, for most people this is expensive, complicated and risky.
    Surely it would be better to have some financial discipline now and prepare for the future with your eyes wide open?
  • 06 Aug 2010 5:18 AM | Dan Woodruff

    What is comprehensive financial planning?

    Financial planning is about building an objective plan for your financial future.  You should follow these principles to ensure that every aspect of your financial life is covered, and therefore build a solid foundation to meet your goals.

    Your goals will depend on your own personal situation and what you want for the future.  For example, you might want to plan for retirement, buy a second home or send your kids to private school.  The list is only limited by your imagination.

    This is all based on a common sense approach.  Anyone can do it, you just need to be methodical and objective.

    What about financial advice?
    Unfortunately, most financial advisers do not offer comprehensive financial planning.  Most of them are glorified sales people.  This is proved by the fact that they usually sell products rather than financial plans.

    If your financial adviser starts by talking products he is thinking about himself rather than your future!

    Of course, there is a place for products, but only at the end of a comprehensive analysis of the reasons why you need that solution.  What’s more your financial plan might reveal that you do not need further products!

    What should be in your plan?
    Here are the main areas which need to be covered. There may be other areas, depending on your own circumstances.

    Gathering data
    You need to think of your plan as a whole because your financial decisions are inter-linked.  For example, if you have an expensive mortgage this may impact on your ability to save for the future.

    You will need to get together data on every aspect of your financial situation.

    Setting goals
    Without an end in mind, it will be difficult to evaluate your progress.  Therefore you should think carefully about what you want your future to look like.  These goals should be measurable.

    Income and outgoings
    This is fundamental to building your plan.  If you spend less than you earn, you have a chance to affect your financial future.  If you spend more than you earn you will have limited options and could spiral into debt.  Understanding tax is a big part of this.

    Assets and liabilities
    You need to build up assets to underpin your financial future.  And more importantly you need to build up the right kinds of assets.  The sooner you can be debt free (unless it is the ‘right debt’), the sooner you can be in control.  For planning purposes we ignore certain types of assets.

    Emergency funding
    Making sure you can cope with short-term crises is vital. We recommend that you set aside 3-6 months worth of outgoings.

    Protecting what you’ve got
    You should think about what happens if things go wrong. This includes all types of insurance to ensure your lifestyle is defended from catastrophes.  You should also consider making wills and powers of attorney etc.

    Paying off debt
    Generally, any debt is a barrier to your future prosperity. The sooner you become debt free, the sooner you have control over your future.  Remember that your bank manager includes your mortgage as one of his assets!

    Saving for the future and investing wisely
    You need to work out how much will be needed to fund your future goals, how much risk this requires, and the effect of external forces such as inflation, charges and future legislation.

    Tax
    While this should not drive your plan, it is certainly an important part of the equation.  Understanding how tax affects your life should run throughout your plan.

    Monitoring your progress
    Financial planning should be much like servicing your car.  You wouldn’t spend £20,000 on a new car and then never take it to the garage for a service.  Likewise, you should regularly review your plan to ensure your remain on target to meet your goals.

    Of course, your circumstances will also change over time, so your ultimate goals may also need a tweak from time to time.

    Conclusion
    As you can see, a proper financial plan should be extremely detailed, and will take some work. However, the rewards will really benefit you as you will be back in control of your life.

    Want some help?
    We work closely with our clients to develop and maintain their financial plans.  If you would like some help in preparing your plan, please contact us.

    About Dan Woodruff
    Dan Woodruff is a Certified Financial Planner with Woodruff Financial Planning, Independent Financial Advisers based in Colchester, Essex.

  • 04 Aug 2010 7:09 AM | Keith Churchouse
    Thursday, July 29th, 2010

    As you will have seen from the paper and TV/Internet the headlines today, it’s a big pensions news day, facing up to some of the realities of funding future pension benefits, although many will have their own view on whether this is good or bad.

    In general, the UK public is living longer than its predecessors and this is putting pressure on pension funds to keep paying for longer. Taking this and other factors into account, it is not suprising that the headlines feature the following headlines:

    ‘Plan to axe fixed retirement age’ (BBC) confirming that employers will no longer be able to force employees to retire at 65 from October 2011. Many will welcome this opportunity to continue to contribute to the UK workforce for as long as possible.

    Also,

    ‘Warning on local councils pensions’ (BBC) confirming that the liabilities of the Local Government Pensions Scheme (LGPS) were rising and that action was needed to control the future situation. The proposals include increasing employee contributions, increasing the retirement age and possibly adjusting the benefits paid out.

    This news, coupled with the rise in proposed State pension benefits age, the switch in increases to the Consumer Price Index (CPI) from Retail Price Index (RPI) clearly suggests the pressure that pension funds are seeing as time and liabilities move forward.

    If you plan to review your pension planning in light of these proposals and changes then seek Independent Financial Advice.

    Keith Churchouse Director of Churchouse Financial Planning Limited

    Churchouse Financial Planning Limited is authorised and regulated by the Financial Services Authority. No individual advice is provided in this comment and you should seek independent financial advice for your own needs.

    Churchouse is a registered Trademark of Churchouse Financial Planning Limited.

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