Thinkpiece

01 May Thinkpiece

In this update:

• Keeping your costs in your sights …
• No economic or market predictions

Welcome to this financial planning update. Here we share some views on various topical points relating to financial planning.

Keeping your costs in your sights …
 

If you go to the doctor when you are feeling under the weather, the first thing the doctor will do after you are sitting in front of them, is begin to diagnose what may be causing your symptoms. This may extend to tests – listening to your chest, heart, testing your pulse and your blood pressure, and then ‘take your bloods’ by sending your blood off for analysis.

We can draw some parallels from this when diagnosing your financial health. One of the first things that must be done, like a doctor testing your blood pressure, is to determine the pressure on your resources. If you are retired, how much pressure are you putting on your financial resources. Is your foot flat to the floor, or are you only applying a gentle pressure?

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly”.

Ernest Hemingway

The Sun Also Rises

This matters, because when markets let you down without warning, and they will (temporarily) let you down without warning, you need to ensure this doesn’t impact on your long term financial stability.

An important, but often overlooked element when planning, is therefore to keep your anticipated expenditure in your sights. To do this, you can divide your expenditure further into the following elements:

1. 1. The basic cost of living – This includes all non-discretionary expenditure such as utility bills, council tax, food and any outstanding accommodation payments (such as mortgages and rents) or care expenses if these are ongoing. This is expenditure that you would find potentially impossible to reduce.

1. 1. Lifestyle expenditure – This is expenditure to support your lifestyle. For example, you may wish to spend money on socialising, holidays, cleaners, etc. Whilst this expenditure could be reduced, it is expenditure that you don’t’ wish to compromise on to maintain the lifestyle you expect

1. 1. Discretionary expenditure / savings – This is expenditure which is purely discretionary and could easily be cut back by you at any time. It may include current savings into pensions or investments which will likely cease in retirement. If you are still working, this may be considered disposable income.

 
If you speak with a financial planner, expect them to want to understand your expenditure to this level. It also pays to anticipate how your expenditure may change in the future. It’s not difficult or onerous to keep a simple check on your costs.

It’s not how much money you make that matters but how much money you keep—and how long that money works for you.

Robert Kiyosaki

Failure to keep track of your expenditure can lead to overspending, and before you know it, you’ve fallen foul of lifestyle creep. It is then very difficult to roll back increased expenditure which has come as a result of having increased capacity to take on that expenditure, such as on the receipt of an inheritance. This is very common when paying off your mortgage or other beneficial financial event. The surplus money that is now available, mysteriously ends up being spent on new stuff or more of the old stuff!

By budgeting well, measurement drives discipline, which in turn drives behaviour, stopping us from overcommitting ourselves or overspending, and inadvertently killing our golden goose!

If you’re accumulating wealth, effective discipline can be the difference between paying your mortgage off early, retiring early, or helping your family. Without these simple steps, the possibilities of these events happening earlier reduce.

If you’re retired, effective discipline can be the difference between running out of money and never running out of money.

Will your money outlive you, or will you outlive your money?

So, there are clear choices, and consequences. If you decide not to do something, you have still made a choice.

An honest appraisal of your current financial circumstances is required. Face the music. Ask yourself, are you penny wise and pound foolish?

No economic or market predictions 

 
For those that follow these posts, you’ll note the lack of economic or market prediction. They are everywhere, from the mainstream media, social media, self-proclaimed ‘investment gurus’, or (now that you are allowed out again), even the bloke down the pub!

So why no economic or market predictions here?

Well, as the saying goes, it’s difficult to make predictions, especially with regards to the future!!

I used to keep cuttings of all of the main economic predictions from the main broadsheets that I had read – ‘The FTSE 100 index will be such and such by the end of the year….’, ‘Gold could be worth $$$$ if the economic rout continues’, ‘Shares in Newco reach record heights. Is now the time to buy?’, ‘Experts predict that equity returns for years to come are going to be lower than in the past’ and so on and so on.

All of these predictions had one thing in common. They were all wrong.

Some of them were written by eminent economists and experts with degrees coming out of their ears.

Therefore, if the so-called experts can’t get it right, why should we even bother wasting our time trying to predict this or that? It’s pointless.

For any sensible investor, with a well-constructed and diversified portfolio, these ‘predictions’ don’t even enter their thoughts.

Ask yourself why these predictions are being made in the first place. The job of the media is to sell media. A key tenet of a well-constructed financial plan is to not let markets or the media inform your financial planning. There will always be negative news to report. Learn to ignore it. The media do not have your financial futures in mind.

A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.

Warren Buffett

If someone is trying to peddle some direction that you should follow to avoid financial armageddon, ask yourself why? The internet screams these daily recommendations for ‘this and that’ at us all.

What’s often needed is a well-constructed and sober investment portfolio based on buying funds that hold quality businesses, not this week’s ‘cannot lose’ stock!

The people that made the most money in the gold rush were selling shovels, not digging for gold.

 
Of course, this is all part of our service to our clients, ensuring they don’t fall foul of traps that can catch the unwary off guard.

Summary 

• • Take charge of your planning by understanding your current and anticipated levels of expenditure.
  • Invest time in working with a good financial planner, not reading up about the latest stock picks or market predictions.

There are no shortcuts to any place worth going.

Beverly Sills

If you’ve not yet put in place a sound financial plan and you’d like to know more, please feel free to contact us on 01626 305318 or via email here.

Best wishes from all at Stover Financial Planners!

The views expressed are not to be taken as financial advice. Professional advice should be sought before proceeding.