Disclaimer: we are not financial planners, this article is for information purposes only. This should not be a replacement for sound financial, tax and estate planning or legal advice.
Save for the few lucky individuals for whom money is not and will never be a concern, most people in the world invest their time or capital to earn money to finance their lifestyle, however frugal or luxurious it may be. That being said, lifestyle financial planning is not given as much importance as it should be.
A Guide to Lifestyle Financial Planning
Considering money’s role as a store of value and a medium of exchange, it is staggering to think that financial literacy, even in developed countries, can be poor. Many people, including those we entrust with managing our own financial affairs, may struggle to keep on top of their finances and constantly play catch up, much less have the resources to live the lives they really want.
Whilst it is helpful to have some education in finance, it is far from being a prerequisite. A forensic knowledge of your finances in the context of:
- your financial goals
- the tools with which to record and manipulate that data
- a solid foundation of general financial principles to inform your decision-making, and
- an awareness of your financial ecosystem and how it works
– are all the tools anyone will need to take control of their finances.
This article is intended to give a brief introduction to the art of lifestyle financial planning. From data manipulation and visualisation, money saving tips, sound financial management, and dispelling the odd myth, we hope to provide readers with the tools to best identify and achieve their goals, whatever they may be, in four broad themes.
Know Yourself
First and foremost, it is vital to take stock of your financial situation – after all, it is impossible to plan where to go next if the point of departure is unknown. Be forewarned that a tolerance for spreadsheets, pivot tables and charts is required to maximise and properly visualise the results, so it is best to brush up on those skills via a quick online course (Youtube offers plenty of free options).
Over the course of the next few months (a longer time frame is required so as to iron out any periods of time where there are abnormally higher than usual cash flows), take stock of all of your incomings, outgoings, assets and liabilities. As the exercise is meant to give an accurate picture of your finances, be sure to include savings, assets, taxes (owed and credits). This should give you an accurate picture of your cash flows and net worth at any given point in time, as well as allowing you to extrapolate your position outwards.
If a little extra help is needed to do this, consider investing in a personal finance tracking app or a bank card with analytics that will help collate the data such as Mint and Revolut. You may have to manually stitch the data together, but eventually you will get a representation of your periodic cash flows and their effect on your net worth. This will also help to instil the habit of “tracking” and making you acutely aware of your finances and where your major cost centres are, and also giving you tangible measurements or benchmarks against which to gauge your finances.
Once you’ve established this, you can also enhance the data by account for specific events in the future. Are you going to be putting down a deposit on a property and paying out a mortgage? Ensure it is reflected in transactions. Liquidating an investment? Account for the receipt of capital and any gains.
A Financial Bootcamp
You should now have a handle of your data and should be able to recall it with accuracy. Before establishing any longer term financial plans, you should allow yourself the greatest chance of success by ensuring your finances are on good footing.
Low Hanging Fruit
The first part of this exercise is far from a full-blown deep-dive into improving your finances, but is aimed at taking aim at your assets and liabilities, and optimising them with some easy wins – in weight-loss terms, think of this as diet and exercise, rather than liposuction. This exercise is really addressing two things: 1) to cut expenses; and 2) improve return on assets.
We recommend that you return to your data and examine your recurring expenses and liabilities, then your revenue and assets. At first instance, we will go for some easy wins. To explain in more detail, many people embrace a status quo when it comes to their financial products and expenses – it is often the case that we make a decision once, and that decision is not again reviewed until an external stimulus forces us to.
With this in mind, you need not change your product and much less your supplier or service provider to get a better deal and pay less or earn more. Whilst we do not advocate choosing on price alone, taking a cheaper product from the same supplier is a no-brainer!
A few examples:
- Mortgages – mortgages often have an initial fixed rate of interest (normally lower than the variable rate), which when lapsed, reverts to a higher variable rate. If this is the case, then go back to your lender to obtain a preferential rate. Don’t forget that if you have built up equity in your property, you may qualify for a mortgage at a lower loan-to-value and in turn get an even better rate.
- Utilities – shop around for the best tariff or best supplier.
- Insurance – when insuring your car, make sure that the replacement value is updated at each renewal – as the insurable value of the car is lower, you will likely pay a lower rate (and benefit from any no-claims benefit).
- Credit Cards – where possible, utilise any 0% interest purchase periods or balance transfers available. Credit cards often run anywhere from 8% upwards, which can add up if not kept in check.
- Savings – if you have any savings, shop around for the best deposit rate to suit your savings maturity or use your tax-free allowances if available to you.
With a concerted effort to review these items, it is conceivable to find savings. Bear in mind that even if the savings are minor, say £100 per month, that is 10% of a disposable income of £1,000, which is a significant improvement in relative terms.
Default Goals
Your next and more challenging part of the bootcamp is to ensure that you meet certain criteria that everyone should strive for, regardless of what your desired lifestyle goals are. There is a lot of conventional wisdom out there on what you “should” be doing to ensure that your financial health is on good footing.
Whilst much can be said, we feel that the most important goals to target are:
- Eliminate or Avoid Bad Debt – where you have either high interest debt (e.g. credit card debt) or debt which does not finance a revenue generating asset (e.g. a car loan), this debt should be reduced or paid off entirely and avoided in the future. This is not to say that a home loan or a business loan should be paid off immediately, but debt which does not contribute to strengthening your assets should be avoided.
- Set Up an Emergency Fund – you should ideally have liquid assets (i.e. cash, cash deposits, or other assets that can be liquidated in the space of a few days) to account for any major expenses or should you lose your job. This is really the “break in case of emergency” piggy bank, and not something to manage any liquidity bumps. How big a stockpile is necessary?
There are conflicting opinions, but the minimum you should target is three months worth of outgoings, and build up from there up to twelve months. Something that would be worth accounting for is “unexpected expenses” like paying for a new boiler or replacing a roof. Where you have assets that require maintenance, such as cars or property, we recommend that you account for 4% of the value for real estate and 10% for other movable assets. - Set Aside Money for “Future You” – with state pensions coming under increasing pressure, saving money for a pension is a decidedly smart thing to do. With the power of regular savings and compounded returns, your small regular contributions will ensure that you are taken care of into your old age.
So how much is enough? That depends on your age – whilst it is an inexact science, it is recommended that you should save half your age as a percentage of your salary i.e. if you are 30, set aside 15%. If an absolute percentage is not possible to manage, then it is definitely worthwhile to take advantage of any employer-sponsored contribution-matching schemes – that’s free money! Bear in mind that tax breaks to incentivise contributions can make your contributions cheaper.
There are other rules of thumb to note such as diversify your assets and revenue, and keep your outgoings less than your incoming. Some rules are imposed, such as a bank requiring your monthly mortgage payments to be less than 30% of your net salary (depending on the bank and your jurisdiction) or landlords requiring you to spend no more than 30% of your monthly salary on rent.
Identifying Your Lifestyle Goals
Not everybody will have the same aims, and that is entirely normal, depending on what stage of your life you are in and what your priorities and circumstances are. No two situations are exactly the same, so no two strategic financial plans will be the same.
These may be “simple” or single objective life goals, that is, single outcome which at its core requires money:
- buy your first or next home
- throwing the wedding of your dreams
- going to business school
They may be grander, more complex or multiple-objective plans, which may require greater consideration and not “simply” amassing capital:
- build and protect your family’s wealth
- retire in comfort to a Caribbean island or a Greek island with a villa
- build your family business into a national or global player
When identifying and articulating your goal, it is important to understand your goal intimately and avoid confusing correlation with causation. Do you actually want to own a summer house on a Greek island, or do you want the financial freedom to jet off to Santorini at your leisure? At its very core, what do you want to achieve? Is it freedom not to be employed? Is it the kind of wealth that allows you to travel the world on a whim? Is it a legacy that you wish to achieve?
Particularly with more complex goals, think of it as your elevator pitch – if you cannot accurately summarise your goal in the time it would take for you to convincingly explain your goal to a stranger in an elevator, then go back and refine it until you can. The quantum of the goal is immaterial, as long as you have a target and a road map.
With each goal, it is important to establish a plan of execution which refers to individual completion milestones and the costs involved at each stage. What makes your end goal achievable is breaking the task into several bitesize chunks, targeting marginal improvements which, individually, do not seem like much, but together and in their context, can help propel you to success. Ensure that you are able to plan out your liquidity needs around each individual milestone. For example, when buying a house, you need a deposit at first instance, any stamp duty or property tax plus agency fees.
Whilst the circumstances of the success may depend on market forces or sometimes blind luck, being best prepared by ensuring you are ready to take advantage of fortuitous events that can contribute to your success is imperative. Track your progress regularly and be both reactive and proactive. Whilst focus on your goal is required, do not be afraid to walk away from a vanity project that will, in the long run, leave you disillusioned and further from your goal than expected.
Keeping Your Wealth
Lastly and most importantly, we discuss planning for your financial future, continuity, and succession. After all the time, effort and sacrifice invested in shoring up your finances, the last thing you would want is to lose it all to misfortune and the taxman for want of long-term planning. We advocate a series of measures to ensure that you keep on track.
Firstly, we advocate having a long-term plan. Without going too dark, your horizon should not be limited to your immediate or short-term future, but ideally out to a time when you sadly may no longer be around. This does not necessarily involve planning out cash flows into perpetuity, but you should consider things like retirement income, health insurance, inheritance and succession planning and the like. How long is long enough? As we cannot foresee how long we will actually live, plan for fifteen years beyond your life expectancy at birth.
Ensure to carry out regular reviews of your finances such that you are fully aware of the opportunities, threats, strengths and weaknesses of your portfolio. This cannot be taken in isolation but should be considered in the context of how it fits into your wider lifestyle plan and how it reacts to external stimulus. Consider that changes to monetary or fiscal policy may make certain assets more or less attractive, and you should be alert to these risks and deal with them proactively. As most countries’ budgetary cycles are annual, then an at least annual review of our finances should be sufficient. This will, naturally, require an eye for how tax legislation works.
This brings us onto the next point. As there is so much that you can do without the appropriate training in accountancy, tax or finance, it is a great idea to find some reliable advisors which will be able to guide you through the more tricky parts. This will achieve a couple of things:
- many advisors proactively send out analyses or information related to their field which will keep you in the loop about any new update (many tax advisors send out yearly budget analyses which helps you to focus on key changes); and
- you can rely on years of professional experience dealing with a particular area which involves not only the legislative and policy sides, but also the administrative and practical sides. Definitely consider a friendly tax advisor / accountant, and add on others as you go. A good independent financial advisor will also help with your specific financial services needs. Naturally, your circumstances will change as you grow and your needs evolve, so allow your personal circumstances to dictate which specific advisors you require.
Closing Remarks
The art of lifestyle financial planning is a veritable patchwork of analysis, assessment, evaluation and re-evaluation. Bringing all of these things together, we hope that the steps outlined in this article will provide some basic yet useful information on how to organise your financial life in order to achieve your lifestyle goals.
All images taken in the City of London; featuring St Paul’s Cathedral, the ‘Walkie Talkie’ and the Monument to the Great Fire of London.
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Sarah is a syndicated freelance writer and editor of Dukes Avenue. She founded Dukes Avenue in 2018 as a creative outlet while working at a London hedge fund. What initially started as a small blog has become a widely read luxury lifestyle online publication targeted at the modern woman, with content curated to inspire readers to live their best and most fulfilled lives. Sarah has lived in London, Malta, and, most recently, the United Arab Emirates and uses her travels and experiences to inspire much of the content.
