Protecting yourself against the unknown…
Among the many things 2020 has been, it certainly has been a year to encourage one to look inward at their own health and how, if things took a turn for the worst, would they and their loved ones be ok, financially.
Paying for insurance is never at the top of anyone’s priority list, but arguably, ensuring that you will one day become financially free and independent, more commonly, is. Your health, and the health of your spouse/partner, therefore, plays a fundamental role in achieving this but unfortunately it is a well-known statistic that more people are willing to insure their mobile phones than they are their lives or their income.
Having a financial plan for the future is an amazing step to take in your financial journey, but one must ask themselves, what if were to lose my job, my income or my health, leaving me unable to earn for a period of time or ever again? In those circumstances, how likely is it that I will still realise my dreams? In most peoples’ cases, damage to any of these elements would cause major issues. Whilst there is minor support from the government in such times, such as Statutory Sick Pay (SSP), these will not get you far in the grand scheme of things.
So, what should we be insuring, when you can insure just about anything nowadays? The primary two elements to look to first would be your debts and your income(s).
Protecting your debts comes in the form of Life & Critical Illness cover so that, should you pass away or be diagnosed with an illness as serious as cancer, emphysema or heart disease you receive a tax free lump sum to clear the debt and leave you with something significant less to worry about.
For the employed, over and above how long your employer would pay you for, an Income Protection policy would mean you would continue to receive approximately 60% of your earnings potentially all the way to retirement be that 60, 65 or 67. For the self-employed, where things are less clear cut and there is no ‘sick pay’ as such, an Executive Income Protection policy would achieve the same goal and would include any dividend payments in addition to your normal salary.
Whilst there is an arsenal of insurance products out there, we believe these to be the most important and hope this has provided some food for thought.
Insurance is always a bad idea until something goes wrong… as we’ve seen this year, you never quite know what’s around the corner!
Monte Carlo or Bust?
Monte Carlo conjures up images of sunshine, casinos, super yachts and fast cars. An exciting pocket of wealth in the south of France, where the rich flock in the summer months to flaunt their wealth, drink rose and swim in the crystal-clear Mediterranean Sea.
However, there is another Monte Carlo, an analysis, that we use in financial planning, which one online resource describes as a ‘computerized mathematical technique that allows people to account for risk in quantitative analysis and decision making’. I think you’ll agree this sounds far less sexy!
For many in retirement, knowing just how much they can draw from their pension every year and still know that the funds will last a lifetime is a hard decision to make. Draw too much, too early and you risk running out of money. Spend too little and you risk unwittingly missing out on the dreams you hold dear, which are potentially affordable. The likelihood of the success of your plan will depend upon the returns generated by the portfolio, your individual spending habits and assumptions around inflation. It’s here that the Monte Carlo Analysis can really help; it will run a series of simulations over your financial plan, using random market movements, to provide you with a percentage chance of your financial plan’s likely success.
This will help inform your plan: a low probability will signal that you should possibly try to save more now, or spend less to elevate your chance of success. Or perhaps your chances of success are already high, in which case maybe you can start planning your next holiday alongside the high-rollers in The Provence.
Make Your Money Work For You!
Whilst there have been many side effects of the pandemic in recent months, one of the upsides has been that it has caused the savings rate in the UK to significantly increase.
Between April and June, the percentage of disposable income saved by households in the UK rose to an all-time high of 29.1%. Since the millennium this has fluctuated around 5-10% a year with the previous record of 14.4% set 27 years ago.
This is both an inability to spend money, creating a nation of accidental savers but also and increasing caution given the pandemic.
Whilst it’s important to keep enough cash for emergencies, too many people will be hoarding cash and focusing on the short term. With increased government spending this should lead to higher inflation moving forward, but even if it remains at the usual circa 2% level it will have a negative effect on your money.
Interest rates have fallen even lower and many institutions have cut their rates from historically low levels to even lower. There is even talk of the Bank of England moving to negative rates.
With all that cash sat on the side-lines there is likely to be increased expenditure as and when we leave the limbo state we now find ourselves in. Given we can’t time the market it’s better to put our excess money to work now to make sure we are not too late to the party once the spending taps come back on.
If you’ve found you have more cash in the bank than you expected now is a good time to talk to your adviser about how to enter the market in a safe way, and perhaps benefit from the volatility that lies ahead by investing on regular basis over the coming weeks or months.
Are your finances ready for the second wave?
As we try to avoid a second round of Covid-19 and another potential lockdown, are we prepared for the potential financial effects if it happens?
One of the most important things we learned from the first round of Covid-19 was the necessity of having an emergency fund. As we were all affected so unexpectedly, and to an extent we may never before have experienced, the requirement for accessible and 'safe' funds on deposit became essential, especially at a time when markets across the world fell.
It is recommended to keep 6-9 months expenditure on deposit in an easy- access account. If you do not currently have this in place, it is time to think about how it could be achieved.
There have been reports that parents have had to dip into savings they have put aside for their children's future just to see them through these tough times, most likely because they did not hold a sufficient buffer of emergency funds. On average each family needed to reclaim £700 from children's savings accounts, which amounts to £17m for every day we were in lockdown - all of which was used for day-to-day necessities.
By structuring your finances correctly and ensuring you have a robust emergency fund, these situations can be avoided. The pandemic has been a reminder that the worst-case scenario can become a reality and we should plan accordingly. If you need help or advice rearranging your finances, let us know and we can help put a plan together to give you peace of mind in this time of turmoil.
Client Education Webinar: Protection Planning
At Efficient Portfolio, we believe that protection is one of the most important, yet neglected, areas of financial planning and it’s something we are passionate about improving.
We will be hosting a free educational webinar for our clients on Thursday 12th November at 6.00pm.
During this online event we will help to clarify the solutions and identify the best types of protection for your specific needs, whether you are a business owner, retiree or have a young family.
Charlie’s Mini Blog
I should currently be in Scottsdale Arizona at the Top of the Table conference for the top financial planners from around the world. Instead of sunshine, swimming pools and golf courses to enjoy in between inspiring talks from some of the world’s best speakers, I get to make my own tea, run with the Nala (our dog) in the dark and drizzle, and accept Amazon deliveries at the door. Life in 2020 isn’t quite as much fun, but then it is all about where your focus goes. I could wallow in the loss of an amazing and inspiring trip, or I could be grateful for what it has given me.
Instead of flying to the US for my business development fix, I have got to access these incredible speakers and to interact with my colleagues far more efficiently. Thanks to rapid advances in the technology, in some ways I am gaining more from the conference than I do when I am on site. There is no jet lag, no lost days travelling and no hangovers either, although I can’t decide whether that’s good or bad! Furthermore, I’d have been arriving home halfway through Ffion’s 14th birthday and missing the start of our family Cornwall holiday; all of which can now be enjoyed to the max. So, as long as we focus on what we do have, we can function effectively even under semi-lockdown.
The same applies to getting your finances sorted. There is no reason to hold off if we use the technology effectively to interact. It isn’t as good as being face to face, but it is pretty close if used well, and we are getting a lot of practice as to what that looks like. This could be the new normal for quite some time to come, so don’t let it stop you getting on and doing what’s important.
I have recently maybe the best business autobiography I have ever read, Shoe Dog: A Memoir by the Creator of Nike by Phil Knight. The majority of the book it about pre-Nike, and the early years until they listed, which is perhaps what makes it so interesting.
Shoe Dog tells the story of how a man who clearly had no management skills at all, knew nothing about marketing, had never been in business before and had no capital to speak of built one of the largest brands in footwear. He did it purely on the basis that he was passionate about his trainers…that’s it. The book is a very good read and gives a real sense of what it takes to build a world-beating business. The frequency with which that business nearly didn’t make it is what makes the story a true inspiration.