Over the Christmas period I received various emails, messages and letters offering me loans, and to quote some of the messages “to start the year afresh”. I also received several mailings about sorting out my finances (pensions and ISAs). When I saw some tweets around pay day loans it made me think about all these messages and why we get sucked into it all.
In many cases we don’t read the small print or we don’t understand the consequences of what we are doing, I suppose we are naive. If I take out a loan I have to pay it back, for a pay day loan, if I am short by £400 one month then I am likely to be short the next month so fundamentally I need to review my finances and cut down on expenditure otherwise I will spiral into debt. This doesn’t happen to everyone but I suspect it happens to a lot of people.
And this then leads me onto mailings around sorting out my finances; I love the headlines around taking control and saving money. It is very tempting. If I can save 0.25% per annum over 20 years then my funds are going to benefit. But behind all of this is the assumption that we know what we are doing. One of my first blogs took the example of a car, I know I want a car but is that the best solution to deliver my goal. Likewise by going direct we are buying a product, this is on the assumption that we have done the financial planning upfront and concluded that this is the right product to deliver the solution.
So what do I mean by this, most people assume a pension is the best way to save for retirement. On the way in there is 20% tax relief so £80 a month means the government pays £20 into the pension, the fund is tax efficient and at retirement 25% of the fund is returned tax-free. What is more is that if I go bankrupt or lose my job then the money is protected. But is this the right solution? For example if I want a tax-free income, I want to be able to pass the full fund on death to my beneficiaries and I want to take an income when I want to, is the pension the best solution?
So financial planning will help us decide what is the best product to deliver the goals we have. There is also another point in all of this, when going direct not only does it assume that the person knows the product they want but also how they want to invest it. Remember the tag line is saving you money but if the person investing has no idea on how to invest then they will select funds “recommended” by the “provider” and in many cases will base decisions on past performance.
To some extent what I am saying is that whether someone is plugging a loan offer, a credit card or pay day loan they are no different to someone peddling a cheap ISA or pension. They know that many people will not understand the offer and they play on that naivety. A warning to all these people it will turn round and bite them soon unless they educate.
I am a great fan of do it yourself investing for the right person, I read something the other day that said even as a financial planner we should employ a financial planner to do our own planning. But what I want to do is just outline how someone who has received a mailing about doing it yourself should look at this and then consider whether the saving is worth it.
Why do it yourself?
I see five reasons why we might consider going alone:
- We have a need and know what we want, i.e. we are prepared to do our own financial planning and know how to deliver our goals
- We want online access and ability to trade 24 hours a day
- We have access to plenty of free “advice” through online media, papers, magazines, self-help books and good investment knowledge
- We don’t want to pay for “advice”, and are happy for the responsibility for decisions to rest with us
- We want to take advantage of “low charges” – no advice charges mean charges can be lower
Preparing to do it yourself
If I decide to put in a bathroom I don’t just buy a bathroom and put it in, I have to do some work first. Doing our own financial planning is really no different. Below are some pointers:
Set measurable goals
When I looked at seeking advice I mentioned setting measurable goals this still applies with going direct. Rather than saying you want to be comfortable in retirement, quantify what you mean and how you will achieve this.
Understand the effect of each financial decision
All financial decisions are interrelated, so a decision around a child’s education may effect when and how you meet your retirement goals. Often when we go it alone we don’t think about what we are doing and why we are doing it.
Review your financial situation periodically
Financial planning is a dynamic process; goals may change over the years due to changes in our lifestyle (i.e. an inheritance). It is important that the plans are revisited and reviewed as time goes by to reflect changes so we stay on track with our long-term goals.
Start planning as soon as you can
The decision to go it alone is not an easy one it can be stressful but the key is to have a mind-set focused on financial management, i.e. budgeting, because only then can you focus on saving and planning. To start early is important but also understanding where to invest is crucial to the process.
Like the process of reviewing finances, financial planning should form part of this process so that you can adapt and be prepared to meet life changes and handle emergencies.
Be realistic in your expectations
I remember when I started investing during the nighties you expected funds to return 10 – 15% p.a., and we all thought that things would never change. The last decade changed all of that, is a return of 7% p.a. realistic and are we prepared to have years where we lose money. There are events where we are not in control, for example inflation, stock markets and interest rates, and all of these impact on what we are doing.
So we have to be realistic and we have to understand that the situation will not change overnight, it is a lifelong process.
Realise you are in charge
This applies to everything we do, once we make the decision to go it alone we need to understand what we are doing. When we take out a loan, what are the consequence of doing that? If we think we can save money on our pension by going alone then we need to understand that saving money means that we are in charge, we are in charge of the investments and we are in charge of the products we select.
I have read criticism of some companies who promoted certain funds and people invested because they believed that as these companies promoted the funds they must be worth investing in only to be disappointed by poor returns. These companies have done nothing wrong, these people need to understand they are in charge, they need to look at their whole financial decision making process and question everything before making any decisions.
In summary I may sound as if I am against people going alone but actually I think there is a place and that this market will grow. What my concern is, is that those companies peddling these solutions are, whether intentionally or unintentionally, ignoring the fact that many people who are investing with them don’t realise they are in charge and the consequences of this.
Financial education is not a quick fix, it is a change of mind-set and needs some bold changes. Because direct organisations are marketing machines it may not be a good marketing message to promote but ultimately if they take this on board they will make a big difference to a growing market. So the challenge as you read this is whether the saving is worth the responsibility and only the person making that decision can decide.
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