The idea of building wealth, requires discipline, effort, time and investment !
But it can be achieved by anybody if you follow some simple steps. And above all, think long term. The plan should be considered boring and predictable, it’s not a get rich quick journey.
However, you can achieve your lifetime goals, aims and wants if you create an action plan and get involved in your own financial future.
Nobody else will make you rich, certainly not your employer !
The problem for most people is that the world of investing, personal finance isn’t taught in school or by our parents. So most people think it’s complicated, confusing and can only be reached by the rich, or people that use Financial advisors or those within a specific class of society.
This blog post will outline some key action points that will dispel those fears. So you too can achieve your financial goals and dreams for the short, medium and long term objectives.
So let’s look at the key steps and action points to take !
1) Create an action plan and goals:
You are never going to achieve anything, if you don’t have an action plan in place. Or some simple steps to post you in the right direction. Your plan needs to realistic for you and should highlight the reasons and purposes of what you want to achieve in future. As we say, personal finance is personal to your own goals, everybody will have their own aspirations.
Your goals and ambitions should be specific, so let’s say a set amount at a date in future. They shouldn’t be vague or haphazard, or wishing thinking. You will never achieve your goals it you do it that way. Make them attainable when starting out and as you reach certain milestones and targets, re-evaluate them and update them.
If you set them unreachable, you will never achieve them and you will give up on them. As you reach your initial goals when starting out, it should spur you on to reach your next milestone.
These can be broken into simple bitesize chunks, so short term, medium and long term.
Short term – within the next 6 to 12 months:
It could be to create an emergency fund, get out of debt, create a budget plan. What we call the basics or initial starting steps. As they may initially be uncomfortable setting or thinking of, as it’s alien to most people. So overcome your fear when starting out.
Medium term – 1 year to 5 years:
This could be investing for new car, home improvements, expensive holiday, wedding or school fees.
Long term: over 5 years:
It could be long term or lifelong goals, such as clearing your mortgage earlier than expected, university funds for the children, pension and retirement planning, care home costs, estate planning.
2) Get started with investing:
The hardest part for most people is to make the initial decision to get involved with your finances and personal situation. So make a decision today, to make that initial decision, it could be the best decision you ever make.
For the vast majority, we bumble along in inertia and may look at the odd annual statement, which then gets files away for future years. Or until next year, when the receive the next statement. Before you know it, the years have passed you bye. By taking action in the early years, you will benefit from the 8th wonder of the world “Compounding”. Quite simply the longer that you invest the greater the return as your assets should grow year on year over the course of time.
3) Manage or eliminate bad debts:
Debt for the majority of people, is the biggest factor into why their personal financial situation could be holding them back. You may be living pay check to pay check, so you may be in a never ending cycle of paying off debt, as you are struggling to pay the interest fees and charges.
There are 2 types of debt, what we call good and bad !
Good debt is normally related to a mortgage, which is usually at a lower rate and will cover a substantial purchase. Which will grow in time over many years, plus the property should also increase or appreciate in value.
Bad debt could relate to credit cards, bank loans, car finance, which is normally charged at higher or excessive fees over a shorter time period. If you don’t pay off the credit card the interest will rise each month on any outstanding balance, so are you struggling to reduce or do you just make the minimum amount required each month. the double whammy for most people they will borrow money to purchase a liability which only reduces in value over time through something called depreciation.
Once your are free of debt, learn to use that money to work for you by investing in income paying or growth producing assets.
4) Automate your savings and investments:
Learn to automate your savings on a regular basis, this could be every pay day. I personally have direct debits and standing orders set up for the 1st of each month. So cash will be transferred from my current account or checking account into specific savings products. Such as my ISA, SIPP (Self invested personal pension), emergency fund (separate savings account).
Once you get into the habit of saving regularly, it becomes 2nd nature and it’s done automatically once it’s set-up. It may be that you start off with small amounts, and as you get more confidence or your earnings and income increase you can increase the contributions. Say once you receive annual pay award, or at the start of each year. As part of setting or creating some annual savings goals.
By reviewing your savings at set dates, you will avoid something called “lifestyle creep“. Your assets will grow at a faster rate as you add more money thought the power of compounding.
If you are going to invest, remember to diversify across numerous assets classes. When starting out you may keep it simple, by putting cash in a bank or building society. However as you become more confident, branch into other assets, such as individual stocks and shares, ETF’s and funds. Which could cover several countries or markets to spread your investment risk. Or it could be precious metals or commodities or some rental income.
Learn not to become reliable on only 1 source of income or investment asset class.
5) Learn to grow your income streams:
Most people rely on only 1 source of income, mainly from their employer. Who ultimately controls the amount of hours they work, where they are located, the amount of holidays they are allowed and the overall benefits package on offer.
But you are ultimately trading your time for money. This creates 2 major problems, you are limited to the amount you can earn, and you are at the mercy of that employer.
You will all know people, that have lost their jobs through redundancy, restructuring, relocating to new location. Or a downturn within a specific sector. Most people have no back up plan in worse case scenario.
So learn some new skills, create a side issue or get a part time job. Could you receive some additional interest such as bank interest or dividend paying stocks (what we call simple passive income). Or it could be a bigger purchase such as rental income from 2nd property. As you become more confident, learn to find new income paying strategies.
6) Create a plan for emergencies:
Before you even start venturing into investing, create a buffer known as an emergency fund. Most experts state that this should ideally be 3 to 6 months of living expenses.
This is out of reach for most people, but it could initially be a few hundred pounds to cover short term emergency. Such as car repair or breakdown, breakdown in the home such as boiler repair. Or it could be to cover birthdays in the family or the Christmas period, or upcoming holiday.
By having some funds set aside in a separate account, you can avoid the unnecessary need to borrow money or go into debt over. short term period, subject to excessive rates of repayment.
I personally like to have £ 1,000 set aside for emergency as I would prefer to have money investing and working better for me. But I will hold some additional funds in wife’s name also as she is more risk adverse. You have to find an amount you are comfortable with. But set it aside in a separate account so it can only be used for emergency purposes and not everyday spending.
You may also wish to have appropriate levels of insurance in place to cover essentials such as car or home insurance. But what about life insurance, to cover the mortgage in worst case scenario. What if you have a partner not working, who may be looking after young children. How would they manage or pay the bills if the main earner wasn’t around.
What about getting some income protection policy, in case you had an accident or sickness. Most people will get some cover from their employer, but it may be limited to say 6 months full pay and 6 months half pay. (If you work for a large or decent employer). What happens if you are self-employed or work for a small company, what sick entitlement do you have in place. So consider how will you pay your bills in that scenario.
Be having some emergency money set aside, or insurance in place. It will give peace of mind and some comfort, if circumstances do arise. It avoids any undue stress or worry moving forwards. So take some simple steps as part of your action plan to gain reassurance.
7) Learn to get specialised financial advice:
When starting out, it may appear daunting or confusing, so use simple tools available. Which could be available on bank or building website, your investment APP or platform. Most investment platforms will have great videos, webinars, podcasts, newsletters and bulletins to assist you. All which are free and readily accessible, so take advantage of them.
You could use government approved website such as http://www.moneyhelper.org.uk to assist you which covers basics such as savings, investing, debts, pensions etc. Which could be a great starting point to hep you initially and they also have some interactive tools and calculators.
For later on, you may want some specialist advice to cover investment, taxes, estate planning etc. So you could use a regulated financial adviser, you can find them through http://www.fca.org.uk.
An adviser will cost you money, it could be a % of your portfolio, set fees for specific work or an initial free consultation. But they should explain any terms of business and what they can offer ahead of any agreed work you undertake with them.
Key point:
If you are going to invest in certain assets, such as stocks, shares, ETF’s, funds or investment trusts. Remember to take advantage of the tax free investment wrappers available. In the UK at present, you can add £ 20K into an ISA (Individual Savings Account) each tax year.
If you are investing into a workplace or personal pension, you have something called the “Annual allowance”. So you can contribute £ 60K each tax year, or a lower amount up to your salary. (so if you are earning 40K per annum , you can contribute 40K)
By taking advantage of these products, all gains are free from capital gains tax, income tax and dividend tax under current rules. Plus it will reduce your administration as no need to complete self-assessment forms through HMRC or declare to the tax man.
Remember:
If you found this blog post useful and informative, check out my other posts on https://moneyminted.co.uk which covers savings, investing, pensions and finance book that I recommend. So you too can reach your financial goals in future.
You will get there in the end, if you create an action plan, think long term.
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