15.8%
Emerging Markets
-9.8%
4.0%
2016
Emerging Markets
33.1%
UK Smaller Companies
8.5%
24.0%
2017
UK Smaller Companies
26.7%
Global Bonds
1.6%
14 2%
2018
UK Gilts
-0.1%
Europe
-12.4%
-5.8%
2019
UK Smaller Companies
26.2%
Global Bonds & UK Index-Linked Gilts
5.9%
22.3%
Figure 1: Best and worst performing investment sectors over ten years (source: Hargreaves Lansdown)
I’m not here to tell you what to do with your money but I am going to help you analyse your way of life, your needs and wants, and then build a plan to fund a lifestyle that’s tailored to you. I’ll also give you the mechanisms to make more informed financial decisions, track your progress and give you a greater degree of money confidence that can lead to a happier and less stressful life.
In terms of what to invest in, you have two choices: make the decision yourself or ask a financial advisor. Financial advisors can be independent or tied to a specific range of funds and investments, and all vary in the way they charge. Unfortunately there’s little in the way of free advice. Although I have managed my own finances for a long time, I’m not against getting professional advice and have done so several times. However, my two golden rules would be to:
use a recognised independent financial advisor who is regulated by the Financial Conduct Authority
really understand what it is you’re asking for and challenge the answer.
This second point is important as there’s no blanket advice; it should all be tailored to the financial outcome you want to achieve. It’s analogous to asking a personal trainer to devise a plan for you; it will be different whether you want to increase your stamina, build muscle or train for a marathon. Similarly, there will be different advice for pensions or reducing your inheritance tax liability. Equally, when I say ‘Challenge the answer’, I want you to be bold enough to ask ‘But what does that really mean for me in cold, hard cash?’ There have been many times when I’ve not understood the jargon of a financial answer and I always ask for clarification in simple English. ‘What could this realistically be worth in x years, or what is the genuine risk of me losing money?’
So this is how it all started for me. Back in the mid-1990s, when I was IT manager at the wheel manufacturer, we had a raft of apprentices who would be rotated around the different departments to gain experience. I’d normally start the first conversation with something like ‘Hi, tell me what you’d like to do with your life – what are you interested in doing?’ The response, typical of a 16- or 17-year-old was ‘Dunno’, and the cockier ones often threw it back at me, asking ‘What do you want to do with your life?’ So I told them I wanted a career that allowed me to drive a nice car that I could afford to replace every five or six years (at this point, I was just starting out and had a 12-year-old Vauxhall Nova), a biggish house so I could have people round (I was renting a two-up, two-down terrace at the time) and a garden in which I could relax. I also wanted to eat out at a nice restaurant with friends every few weeks, have one or two foreign holidays a year and be able to afford nice presents for friends and family. Oh, and I also wanted to get married. Every single one of the apprentices replied ‘I want the same thing.’ My response was ‘Great, now you have a plan; you just have to figure out what that lifestyle will cost and how you’re going to earn the money to fund it.’ So this is how you do it.
Step 1: Work out what you want (and what your partner wants)
The key point here is that everyone is different, so there’s no simple template. You may hate gardening and want a city centre flat close to pubs and clubs. You might want a large family and a house in the country. You might have no interest in cars and be happy with a ten-year-old diesel Golf or, alternatively, hanker after an Aston Martin. Your idea of relaxing might be reading, running or playing football. For a holiday, it could be skiing in Switzerland, lying on a beach in the Mediterranean or fell walking in the Brecon Beacons. The list is endless.
Of course, your 17-year-old self is going to have fairly optimistic aspirations but as you get older, into your twenties and thirties, you’ll begin to hone these plans into a more solid idea of what you want out of life. It doesn’t matter if this changes over time; it probably will, but the fundamental theme will likely remain the same. It’s what makes you happy and ultimately what you’d ideally like to spend your non-working time doing.
There’s also a big fork in the road that you’ll hit at least once and likely several times: when you’re in a relationship. I’ll cover this in more detail in Chapter 7 but suffice it to say it’s fundamental that you have a conversation with your partner about what they want out of life. I’m not saying don’t have fun while you’re young, free and single – but when you get to the point where you’re in a serious relationship, you really need to make sure you’re both on similar pages. You don’t have to have exactly the same ideas but they should broadly align, otherwise you’re pretty much guaranteed to start falling out further down the road. Two of the common reasons for relationship breakdowns are a lack of communication and a difference in priorities. Most big financial decisions or goals are long term; therefore they need to be prioritised and agreed upon – so talk about them.
Later on, when you reach your forties or fifties, you’ll hopefully be approaching paying off your mortgage, your kids may be out of your hair and you’ll start thinking about retirement. It’s still the same concept but the plan flips from one where you’ve been acquiring assets (paying the mortgage, earning a salary, investing in your pension) and you start consuming (spending). This is the ‘twilight’ phase of your plan and there’s a lot of varied data available on typical spending levels in this phase; an example is shown in Figure 2. For either a single person or a couple it suggests the annual cost of living for three different levels of lifestyle, together with a London weighting.
