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5 key points for becoming financially independent

Archive for June, 2020

5 key points for becoming financially independent

Wednesday, June 24th, 2020

Financial independence can seem like the holy grail. We may be striving towards it but feel bombarded by lots of conflicting messages on how best to attain it. These five points give an interesting perspective:    

Income is not the same thing as wealth

Having a high salary can help you accumulate wealth but that’s no good if you’re still spending more than you earn. That’s why you might hear of a professional footballer earning £30,000 a week going bankrupt while a bus driver, who’s saved diligently all his life, can retire a multi-millionaire. To avoid the spending trap, remember your real wealth or net worth is the amount on your balance sheet – your assets minus your liabilities.

Regardless of what your income level might be, try and achieve financial independence by thinking long term. What goals can you put in place regarding your career plans, your investments or any property you may have?        

Create surplus funds

To take advantage of any investment opportunities, you need to have sufficient money to invest, and to be successful in investing, you need to reach a critical mass. At this point, the returns generated on your savings will have more impact. For example, a 10% return on £10,000 would give you £1,000 before tax, while the same return on a portfolio of  £1,000,000 would give you £100,000 for the same amount of effort and research.

Amassing wealth is a gradual process but through small steps to cut expenses or generate income, it can amount to something over time. When the interest your money has earned starts to earn interest too, that’s when you’ll really start to notice the difference. This is where the power of compounding comes in. It also means you can invest more the next time an opportunity comes round and so on.     

Taxes have an impact

Think carefully about where you hold your assets. Remember not all income is treated the same. You may have a great deal of wealth but be generating a lot of taxable income, while someone who has attained their goal of financial independence may have maximised their capital gains allowance and done some tax-efficient retirement planning.

Take control of your time

Your definition of financial independence may be being in charge of how you spend your time each day. Enjoying what you do for hours on end can be better than any financial return. So while you may not have quite reached your ultimate investment target of maintaining your ideal lifestyle without a monthly paycheck, having the freedom to spend your time how you want is worth a great deal.             

Promote the same values

Becoming financially independent is easier if the rest of your family shares the same goal and beliefs. Does your husband or wife have a similar attitude to saving, investing and risk as you?     

Encourage your children to grow up to be financially independent and manage their own money. Offer them support but don’t let them grow up always expecting a financial hand-out or free board. You’ll never gain financial freedom and neither will they.     

 

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Retirement planning in the time of Covid-19

Wednesday, June 24th, 2020

The COVID-19 outbreak has signalled the dawn of a worrying time for everyone. As well as anxiety about our own health and the wellbeing of our loved ones, many of us are understandably worried about the financial future. Recent stock market turbulence is concerning for all investors, but particularly for those who are in defined contribution pension schemes and looking to retire in the near future.

The important thing is not to panic. Although we are in very uncertain times, reckless actions could severely endanger our financial wellbeing in the future. Here are some things you should consider if you’re planning to retire in the next few years:

Don’t cash out suddenly

Cashing out in a panic could severely damage your financial security in retirement. Although no one knows when the markets will recover, selling now could mean that you are taking your pension at the bottom of the market. It’s likely that financial markets will regain their strength over a period of time, even if we don’t know how long this could take.

What’s more, cashing out will mean that you’re likely to end up paying lots of unnecessary tax. In most cases, only the first 25% of a defined contribution is tax free; the rest is taxed as income. Chances are you’ll end up with a gigantic tax bill.

Remember that pensions aren’t the only form of retirement income

Retirees frequently use other assets such as cash ISAs, cash savings and rental income to provide for their life in retirement. If you have any other assets, you could use these to fund the first few years of your retirement in order to give your pension time to recover. The benefit of this would be that you wouldn’t be drawing from your pension pot when the markets are low.

If you don’t have any other assets to fund your retirement, you could consider delaying your retirement or working part time for a period. Hopefully, this would allow the markets time to recover, giving you more confidence when you finally do leave the workforce. 

Watch out for scams

Unfortunately, some unscrupulous people see times where people feel financially vulnerable as an opportunity to exploit them. There has been a lot of fraud since the start of lockdown and it has been reported that people are being scammed through being sold non-existent pension plans. 

Whatever you’re planning to do with your pension savings, it’s vital to check that the company you’re planning to use is registered with the FCA. Keep on your toes and if you see anything that looks too good to be true, it probably is.

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The ins and outs of income protection

Wednesday, June 10th, 2020

Given the current climate, it’s not surprising that income protection is a key concern for many people. Insurers have reported that the number of enquiries about this type of cover rose by more than 1,000% in March as the number of people fearing redundancy skyrocketed.

Income protection is an insurance policy that pays out if you’re unable to work because of injury or illness. It can include: 

  • Mortgage cover
  • Redundancy protection
  • Loan protection 
  • Accident and sickness cover  

Despite it being probably one of the policies most needed, traditionally it’s been one of the least popular products that people take out. According to a survey by Which?, only 9% had income protection compared with 41% with life insurance and 16% with private health insurance. It is, however, recommended for any adult of working age as very few employers will cover your salary for more than a year if you find yourself unable to work.   

The cost of income protection is worked out depending on factors such as your health, whether you smoke and how much cover you need. Insurers also take into account the level of risk in your job. 

Some insurance providers have started adding coronavirus exemptions or pulling out of the income protection market altogether. However, others have shown quite a bit of flexibility by offering payment holidays for vulnerable cases or offering the option to put policies on hold. They will still offer policies to those on furlough, although they won’t pay out if you are made redundant. 

A policy will usually pay out between 50%-70% of your earnings, tax free, although sometimes this is capped. It will pay for as long as the policy lasts or until you can go back to work, whichever is soonest. Most policies don’t pay out until after a waiting period which can be as long as 13 weeks on some of the longer ones.      

If you’re thinking of buying income protection to cover the COVID-19 outbreak, it’s unlikely to pay out if you’re only ill for a short while or are self-isolating. Most policies are designed for long-term absences. By the time the waiting period is has passed, your period of illness or self isolation  could be over and you could have gone back to work. 

You may want to consider index-linking your protection. This means that it will rise with a measure of inflation such as the consumer price index (RPI). Otherwise you could come to make a claim only to find that the level of protection hasn’t kept track with the way your salary might have risen.     

A further consideration is ‘stepped benefit’ so that you opt to choose between two different levels of payment depending on the sickness benefits offered by your employer, a lower payment while your employer is still paying you a higher percentage of our salary and a higher amount when your employer reduces their contribution.  

There are over 20 different income protection providers so shop around and make sure you’re clear about the conditions under which the policy will pay out.  

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June Markets in Brief

Wednesday, June 3rd, 2020

May saw a more positive month for most of the stock markets we discuss, despite the COVID-19 pandemic taking centre stage across the globe. India and Hong Kong aside, all major stock markets made gains during the month. 

The world is tentatively beginning to emerge out of lockdown and there are some signs that the engines of the world’s economies are beginning to restart. These might serve as some consolation for concerned investors, which – given the current crisis – must include anyone with stocks, shares or an invested pension.

However, it must be emphasised that we are still far from a fully fledged economic recovery. Although there are some promising signs, like early flowers in Spring, these signs could be quickly killed off by the economic frost that would result from a second outbreak of COVID-19. Away from the stock markets, the global unemployment crisis deepened to depths not seen in living memory and many large firms remain just a rescue package away from collapse.

UK

The UK continued its economic stimuli policies during the month as it “fought back” against the global pandemic. Rishi Sunak announced that the furlough scheme would be extended until October, although companies will be asked to contribute an increasing amount to the cost. 

May saw the return to work for many after Boris Johnson announced the gradual easing of lockdown restrictions on 10 May. However, the high street remains closed for ‘non-essential’ shops until 15 June, and the possibility that consumers – in the words of M&S boss Steve Row – “may never shop the same way again.” Lifestyle retailer White Stuff were among the latest to announce significant job cuts over their 120 UK stores.

There have already been many job losses across the country and there are expected to be many more as the furlough scheme winds down. Boris Johnson has hinted at a post-crisis jobs programme which would create “high class jobs for the country”; the success of such post-crisis recovery strategies will be vital as the country emerges from the crisis. 

The FTSE rose by a promising 3% during the month to end up at 6,077, and the pound fell by 2% against the dollar to close the month at $1.2343.

Europe

The economic picture across the channel certainly wasn’t a rosy one. During the first quarter, the Eurozone economy contracted by 3.8% and the European Commission forecasted a “deep and uneven recession.” 

There was plenty of grim company news. Renault announced 15,000 job losses around the world, despite the French government’s announcement of an €8 billion rescue package for the car industry. Elsewhere, Nissan closed its Barcelona plant with 3,000 jobs lost.

In spite of all this bad news, the continent’s major stock markets both finished up, possibly bolstered by the €750 billion EU rescue package announced during the month; the German DAX was up by an impressive 7% to 11,587 and the French stock market rose 3% to 4,695.

US

The world’s largest economy suffered a tough month. By the end of May, nearly 40 million Americans were claiming unemployment benefits and Jerome Powell, Chairman of the Fed, announced that the economy could contract by 20-30% during the crisis. 

General Electric announced massive job cuts that could amount to 16,000 jobs and car rental firm Hertz filed for bankruptcy protection after the pandemic caused demand to “collapse”.

Declining retail sales and a record fall in manufacturing output have fanned the flames of this hard economic picture. However, there are faint signs of optimism that new economic opportunities will emerge for innovative firms after the crisis. Thankfully, America’s stock markets echoed this optimism rather than the discouraging headlines. The Dow Jones index enjoyed a good month and rose by 4% to 25,383.

Whatever you’re planning to do in June, we hope you have a pleasant month. In spite of the gloomy news and uncertainty, in May the UK enjoyed the sunniest calendar month on record. We hope that this fine weather continues during June and that you’re able to make the most of it, even if it’s just from the comfort of your garden.

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