How do you deal with the money when it comes in each month to get the biggest bang for your buck? We would recommend creating a simple money management method.

The method we employ is created by setting up a number of different accounts, so that when you get paid or whether you draw the money out of your business, if you run your own company, you could divert it off into different areas that deliver you the best results possible.

So, what are those different areas? The first is a long-term account. A long term account is the money that you're going to use to generate you an income in retirement. Typically, that's going to be a pension, which is essentially most tax efficient way of getting to retirement.

We then also need a medium-term account. A medium-term account is something where you can still get your money working harder for you, but that you can still access, when you need it. For example, you may need to pay for your children’s education or move house.

Next is the savings for specifics account, which might be an account for cars, holidays or home improvements. It might also be an account for any tax or large bills you pay on an annual basis. By diverting a pre-set monthly amount will mean that you don’t overspend and will have enough to achieve what you set out to do.

The first wrapper is a pension. The money you put into a pension can be paid in before you pay any tax, for example through you company scheme or via your employee pension contributions. When you get to 55 or older, you can currently take 25% out as a tax free lump sum, and the remaining 75% you can take out as quickly or slowly as you want, but you do have to pay Income Tax on that percentage, albeit at a time when you are likely to be charged a lower Income Tax rate (as you’re not working).

The next wrapper is an ISA. With an ISA you do have to pay the tax upfront, but when it comes to taking the money out, it's tax free. ISAs offer a really valuable annual allowance, and you've got the flexibility of accessing the money before 55 if you need to.

The third wrapper is an Offshore Bond. With this wrapper you do not pay the tax upfront, and you can draw an income, but tax is deferred until you encash the policy or you die and is charged as Income Tax. There also can sometimes be tax charged on any capital gains you make on the bond, depending on the policy type. Offshore Bonds are slightly more complex than ISAs or pensions, but they can be a good alternative for where people have fully utilised their pension and ISA allowances and have other capital to invest, particularly where they only want to draw out income later on in life.

Finally, there are Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS), and Seed Enterprise Investment Schemes (SEIS). These are far more complicated solutions, and are generally only recommended to highly experienced investors, depending on their situation and capacity or risk and loss. With VCTs, EIS and SEIS, you get a tax reclaim when you invest, but you will need to leave your money in the scheme for around five years. The upside of this is that you're not restricted to getting access to your money until you’re 55, and when you take the money out, it's tax free. In addition to that, sometimes these schemes can defer Capital Gains Tax and they can minimise Inheritance Tax. A warning though-these are much higher risk investments that the other wrappers and can be very complicated. You definitely need to get advice on looking at these types of investments, but they can a brilliant tool for the right situation.

Thankfully, investment houses have taken note of this dichotomy and are providing a solution.

Do you remember a time when the world laughed at electric cars? The imaginings of these futuristic ‘robots’ felt a little like you were peering into the obscure and incongruous mind of a sci-fi writer; what would be next? Flying microwaves?

But jump to the present day and electric cars are very much a reality; so much so that I’ve got two charging on my driveway! Electric cars are just one way people are saving money (personal gain) and helping others (benefitting the wider world).

We are starting to pay heed to the warnings over global warming and are now fervently fighting to save our planet. Being ‘green’ and socially responsible is more than a fad; it’s becoming a way of life that is crucial to the future of our planet. And, most importantly, people are genuinely passionate about it. It’s not that we’ve suddenly learned compassion, it’s that we now have more opportunities to play an individual role in the battle to save our surroundings.

Over the last 3 years, an investment trend known as ‘Ethical Investing’, or ESG (Environmental, Social and Governance), has provided one such opportunity for people to grow their own personal wealth whilst sustainably investing and acting with social responsibility. Ethical Investment incorporates environmental and social factors when selecting funds, but also aims to provide a competitive financial return.

Whilst it would not be prudent to try and compare the returns from the ‘old stock’, such as tobacco, alcohol and arms, with the new ‘green kids on the block’, many experts are suggesting that Ethical Investing is on the brink of something big. The Financial Times stated that “Investors are finding that if they are good to the planet and to people, they also end up, on average, benefiting themselves. There is mounting evidence that funds which observe environmental, social and governance (ESG) standards in their strategies tend to outperform those that don’t by a significant margin.” ¹

It is important to note here that Ethical Investing can increase your investment risk, and can potentially reduce the investment returns. Why is that? Because by limiting your investments to only ethically focused companies, you limit the pool of investments that can be selected from. Particularly when the Investment Manager is selecting funds, there are far less options to choose from.

That said, since the UN Principles for Responsible Investment were introduced in 2006, we have started to see the likes of the Vanguard Group and Fidelity Investments increasingly offering Ethical Investing; a trend which doesn’t show signs of slowing. Guido Fürer, the chief investment officer for Swiss Re, has also said that “It is more than doing good — it makes economic sense,”²

It is not our job to influence you as to which way you want to invest, but to give you the options so that you can make the right decision for you. So I wanted to let you know that your Discretionary Investment Managers, PortfolioMetrix, have added a selection of Ethical Portfolios as part of their offering. You can maintain the same risk level as you currently have with your portfolios, the only difference being that the underlying holdings will then meet the criteria for and ethical portfolio.

This isn’t an all or nothing choice either. I would not necessarily recommend you move your entire portfolio over to the ethical portfolios, however if this is an area that is important to you, you may wish to change the strategy on one of your accounts (e.g. your ISA) so that some of your money is being pushed towards more ethically minded operations.

If you would like to know more about how you can elect to invest in the portfolios that are more in line with your social and environmental views, we would be delighted to discuss your options with you.

Please get in touch by calling 01572 898060 or emailing [email protected]

1. Financial Times- 3^rd September 2017
2. Financial Times- 3^rd September 2017

I want you to understand that there is no such thing as ‘no risk’. If we look at a jar of coppers as an example, the amount of money you’re collecting is being affected by risk every day. No, it’s not directly Stock Market risk, but it’s risk all the same.

The best analogy I can use here is chocolate. When I was a teenager in the 1990s, you used to be able to buy a Cadbury’s ‘Chomp’ for 10 pence. If I went to buy that same bar of chocolate today, I’d be lucky to find it for less than 20 pence. Not only has it doubled in price, but it’s actually shrunk in size: it costs more and you get less. What’s happened here is inflation. The worth of my money has decreased, so I can buy less with it.

That jar of coppers will gradually become worth less and less as time progresses. It’s not receiving a rate of interest, so it will never beat inflation. The same can be said for any money sat in the bank that is receiving a rate of interest lower than the rate of inflation: that can include your savings accounts, Cash ISAs especially where the introductory offer has expired and at the time of writing, all current accounts.

As an example, at the point of writing, the best accessible Savings Account I can find on a comparison site is offering 1.1% interest per annum. The current rate of inflation on the goods you buy is 3.5%. This means even if you have chased down a good savings account, you are guaranteed to lose 2.4% of your money every year this continues. Yes, you read that right, guaranteed to lose 2.6%. And whilst I accept is a relatively high example, almost without exception you would have lost money every month for the past 10 years! If that had been the inflation and savings rate across that 10-year period, £10,000 of your savings would now only be worth £7,843!

As a caveat here, I would like to point out that it is generally a good idea to keep some money in cash for day-to-day expenses and emergencies, so you certainly shouldn’t be thinking about investing all of your money.

So, you are always taking risk, but there are different types. To receive growth, and allow Compound Growth to work it’s magic, you do need to take some pre-defined risk with your savings. When it comes to your money, especially your saving strategy, you must feel confident and secure that you are doing the right thing. A good Financial Planner will conduct a Behavioural Risk Assessment before you invest, to understand your appetite towards risk, as well as how much you can afford to lose. Before you invest, make sure that you know your unique score.

Once this has been defined, you can then look at how much you need to achieve to meet your goals. There are a variety of tools and techniques, which I will cover in my next book about planning your future. However, for now, I just want you to understand that you need to calculate your Financial Security Number (i.e. the amount you will need to be able to reach the expenses for the rest of your life) before you can begin to decide upon your level of risk. Your Financial Security Number can be simply calculated as follows:

Expenditure – (Passive Income, like rent) x25

It is important to consider that with a Financial Security Number, your income is almost irrelevant- it is your expenses that count. For example, if you earn £100,000 each year you have a high income. But, if you spend £90,000 per year that money would not last very long.

The calculation provided here is by no means exact, but it will give you a good indication of what you should be aiming for. At Efficient Portfolio, we adopt a more sophisticated approach to calculating this number, using a tool called a Lifetime Cash-Flow Forecast, which illustrates the levels of wealth you will need to live out your unique goals. The Lifetime Cash-Flow Forecast enables us to hypothesise different scenarios and tailor expenditures on a year-by-year basis, rather than calculating how much you will need on a flat basis.

Once you have your assessment result and your Financial Security Number, you can work out if you can afford to take less risk to achieve your goals, or if you are comfortable in taking more. Generally speaking, the more risk you take, the higher the returns, but you can also often suffer the greatest losses. Remember, your investments should only be set at a risk level you are comfortable with. As Pound Cost Averaging shows, slow and steady can still win the race, if invested correctly.

To calculate how much risk you can afford to take yourself, you need to work on the premise that you will get an income from your investments plus inflation from your invested capital. For example, if you invest your money with a relatively high level of risk, and could expect a 5% rate of return plus inflation returns, then you need to multiply your figure by 20. If you are more cautious, therefore expect a rate of return of 3%, then you multiply by 33.

Over time your tolerance to risk will change. There will be periods in your life where you need to be more guarded with your wealth, and times when you can take more risk to build higher gains. Equally, market fluctuations will, overtime, make the level of risk on your investment increase. In both scenarios, it is important to ‘rebalance’ your investment portfolio, so it never becomes more or less risky than you want it to be. In the 5th book in this series I will talk about the importance of reviewing your investments, but for now please understand that it is a habit that all successful investors follow, and is pivotal to you securing financial freedom and the future you want.