Are Your Struggling To Know How To Prioritise Your Money/Savings

Are your finances causing you stress?

Are you confused about what to do for the best with your money?

Money is a constant stress for people, we often hear about this within our clinical work. The thing is, unless we have been advised by people around us who not only have the right knowledge and are up to date on what is currently relevant then this advice may not help us to create the best possible financial present and future.

With that in mind, we invited Amy Goodall-Smith a Financial Advisor to discuss the money pyramid. This is a basic outline of the areas of our financial health that we need to consider and prioritise.

A Bit About Amy Goodall Smith

Amy Goodall Smith

MSc in Finance, Fellow & Chartered Financial Planner

Amy has worked in the financial services industry for over 20 years and brings a truly holistic approach, based on her clients’ unique needs and values.

She works together with her clients to establish their ‘why’, the legacy they want to create and help them develop a personalised, long-term strategy.

Amy’s philosophy focuses on maintaining a long-term and trusted relationship with her clients. This relies upon providing a service of distinct quality and integrity, free from any unnecessary jargon which in turn provides her clients with confidence and peace of mind.

Information in this video is accurate as of the time of filming (January 2022)

We recommend getting advice from a financial advisor before deciding to act on any of the information discussed in this section. Every person’s situation and needs are unique and need to be considered as such to ensure the best plan for your requirements.

What Is Discussed In This Video?

Financial advisors are there to help you create the security you want and need and keep you up to date with the moving financial landscape. This money pyramid will be relevant no matter what the changes.

The Top Of The Money Pyramid

The top of the pyramid represents money we should have immediate access to. It is our emergency fund to make sure that we are covered for unexpected eventualities such as your boiler breaking down, redundancy etc. We should have 3-6 months’ worth of our average expenditure set to one side in the bank where we can easily access it.

As an example, if your cost of living was £2,000 per month then you should have £6,000-£12,000 minimum held in the bank. If your expenditure is £4,000 a month then that figure would be £12,000-24,000.

As interest rates are so low currently Amy advised that is all you should hold in your bank. When interest rates are low you lose your buying power as the rate you earn in the bank will be less than the amount that the cost of living is increasing.

The Middle Section Of The Money Pyramid

The middle section is your medium-term investing where you are saving for larger expenses in the future such as school/university fees, a big holiday, house move.

For this, you would be looking at investments such as stocks and share ISA. The interests do fluctuate which is why this avenue is for longer-term investments.

Different Types of ISA

Cash ISAs

This isn’t as good an option as it was historically. The reason is that we can currently earn interest outside of an ISA without paying tax on those earnings. Currently, that means if you are a lower-rate taxpayer you can earn £1,000 in interest tax-free.

Most likely that means that a cash ISA is irrelevant for you as a means of accruing tax-free interest from the growth of your money. It may be that you need to review this should interest rates and rules change.

At the current rates that would mean that you would need to have around £250,000 in an account that is paying interest to be over this level.

It is important not to just move your money out of a cash ISA. Ideally, speak to a financial advisor first to find the best options for your situation and the amount of money that you are already holding. If you are moving money between different types of ISA it is important to make sure that you transfer the money so that you don’t use up your annual ISA allowance.

Stocks & Shares ISA

The amount of interest you can earn within a stocks and shares ISA is higher which can mean that you could more easily reach the tax-free limit on your growth. Therefore, it is wise to keep money within a stocks and shares ISA. Investment amounts can go down as well as up short term which is why this is a longer-term investment strategy.

Base Of The Money Pyramid

The biggest proportion of your money should be down here in the long-term savings, and this includes things like pensions or second properties.

Although we don’t (currently) encourage second properties so much because there’s been a huge tax change on second properties. It’s very heavily taxed. You could lose most of your profit through tax these days.

This section could also include a business you want to sell in the future. Anything that has that long-term view is in this bottom section there because this is our retirement income.

The Office of National Statistics, the ONS. States that (Amy makes reference to us both in this part of the interview) we will probably live until we’re 98. But according to the ONS, the person who is going to live until they’re 200 has already been born.

So, thinking about how long we could live post-retirement, we need to create an income. You could be retired for 30 to possibly 50++ years, so you have to create an income through that time.

This section can also include ISAs depending on how you have earmarked your savings and investments.

Amy mentioned that a lot of people she talks to you have a triangle that has a lot of cash with not very much invested and they state, “I don’t do my pension” “I don’t really get it” or “don’t like it”. Or they have a big top section, skinny middle and a lot at the bottom for retirement.

So this illustration shows people where their current situation is.

However, the most important part of any financial planning is actually building a solid foundation. So before you start saving or investing it’s making sure that all those “what ifs” are taken care of.

So Have You Done Your Will?

A will is really important to make sure that your money goes to who you want it to go to.

If you die intestate, i.e. without a will. It’s up to the government to decide who your money goes to. So write a will. You can get it done so cheaply these days.

If you have children who are under 16 you can appoint who you would like to care for them. If this is not in place then your children will be taken into care until a suitable person has been found. This is the last thing we’re sure you and they would want.

Is Your Lasting Powers of Attorney (LPA) Done?

There are two Lasting Powers of Attorney one for health and welfare and one for property and financial affairs. You do not need to use a solicitor you can set them up yourself at a cost of £82 each currently https://www.gov.uk/power-of-attorney

Why Do You Need An LPA?

Often, we think these things are only relevant in old age however what if something were to happen and you ended up in hospital, what if you went overseas for a long period of time who would look after your post or banking matters if there was something coming up?

This is also really relevant if you are a business owner what if you were incapacitated and your staff needed paying as an example or your business banking needed accessing? You need to appoint people so these things to be done by someone in your absence.

If you have a partner you do not have the automatic right to look after their affairs if anything happens. This includes the choice of medical treatment if you are in hospital and dietary requirements.

Would you allow a blood transfusion? Are you vegetarian/vegan/following a particular diet? Without someone in place who knows you better and what your wishes would be then the decisions will be made for you.

This is also relevant if you have children who are traveling, things can happen which can be health or money-related.

Even better if you are doing your own will and LPAs do them at the same time, you will need witnesses so you can then just ask them to do them all at the same time.

Trusts.

There are so many different trusts. As a simple overview, you’re doing an outline plan of who would inherit your money on your death, so it ends up in the right hands.

You do that to protect yourself from things like divorce or remarriage. Or if one of your kids is perhaps married to someone that isn’t appropriate or bankrupt, loads of different reasons.

It’s also tax planning. If for example if you have life cover, and this only applies to single life cover not to joint life, you can say:

“On my death, I want my life cover to go into trust rather than into my estate. If it goes into my estate, it will be subject to inheritance tax because I’m not married and if goes into trust it’s immediately available for my children if they need to access money.”

Setting up a trust is very simple, just paperwork. There’s no cost involved with doing it unless you use a solicitor.

When it comes to inheritance tax planning, putting money in trust doesn’t mean you are giving it away completely you can still access either the growth on it or the original capital and you can gift the other part either the growth of capital, whichever bit you’re not accessing. So it becomes its own entity.

You set up trustees and the trustees then decide who’s going to benefit from the money. There’s usually a class of beneficiaries or stated beneficiaries and me putting the money in would be called a settler.

All trusts now need to be registered. So if you do have a trust, you need to register it and if you’re not sure how then get in touch with Amy. This highlights why it can be important to be with a financial advisor so that you can comply with rules as they change or make adjustments to your planning, so they are working in the best way for you.

Types Of Financial Advisor.

There should be no cost associated with, and initially meeting with a financial advisor. It is a way to find out if you will be able to connect and have a good relationship with that person, that you trust they have your best interests to heart and for you both to find out if there is going to be a benefit.

Often a financial advisor can help you to save money and/or to earn more in the future.

There are two types of advisor:

Independent Financial Advisor.

They have access to all products and will do the research based on your needs to find the best product for you and your risk profile (this is established after you have gone through this with your chosen advisor)

Because they are doing the work and research themselves, which can take a long time, then they may charge for that time.

All financial advisors are paid by the provider to look after you.

As an example, an ISA would have an annual management charge and a financial advisor would be paid a little bit of that. So the bigger your savings the more they get paid. You should always have an annual review which is part of their ongoing earnings.

During an annual review you will discuss your investment goals, whether there have been any changes to your personal situation, are you on track to achieve your goals and if so what adjustments need to be made. There will be no additional costs for an annual review.

Restricted Advisors.

These have a more limited range of products available. This is because they have a panel of advisors whose role is to do all of the due diligence and do the research to decide which products to go with. Often this is within larger organisations and this is what Amy is.

A Little Note About Mortgages

This does not form part of the money pyramid. I posed the question to Amy as it does form part of our financial freedom for the future.

Amy mentioned that really this does depend on your risk profile. If you feel more comfortable prioritising paying off your mortgage, then do it.

In the past interest rates were much higher at 11% in that situation then yes, paying off the mortgage makes huge sense as that debt is accumulating much quicker than you are earning interest on your savings.

However, currently interest rates are really low.

You may be better to invest extra money in a stocks & shares ISA instead of overpaying your mortgage depending on the current interest rates.

If interest rates rose to mean that this is no longer the best method, move that money over to pay off a chunk of your mortgage. Amy used the example of her own mortgage which is currently at 1.36% and her ISA is performing at 7-8%+ so she is building up her money more quickly to pay off the mortgage sooner.

So Amy mentioned that placing the amount of money that you would be overpaying on your mortgage into something like a stocks and shares ISA. Remember this is longer-term saving as your investment can go down as well as up in the short term, but over a longer time period will earn more than savings in a bank or cash ISA.