Financial planning week: What you should be thinking about
There is no standard formula or ‘golden compass’ on how best you should invest. One investor’s financial objectives and risk appetite may differ vastly from the next and as such so will their asset allocation and the investments suited to them. That said, life does follow a natural progression and so too will your broader financial planning. Depending on where you are in life there are a number of guidelines that you can draw on to help secure your long term financial well-being.
The most important thing to remember is that the earlier you start investing, the more time there is to ride out the ebbs and flows of the markets and reap the long-term rewards.
In your 20’s: Don’t become drowned in debt
If you’re in your twenties or early thirties, chances are that you might have student debts to contend with and have probably just started out in your career. Make sure you keep a handle on debts and pay these off as soon as you can.
You may have a relatively small amount to invest which you would both like to grow and preserve. A tax-free wrapper such as an ISA is likely to be the most suitable investment vehicle for you. As a young ISA investor you have one big advantage: time. This will enable you to take full advantage of compounding which can make a significant difference to your investment’s total return over the long term.
In your 30’s: Make sure you’re saving into a pension
For most people, their thirties is a time when you make some big and important commitments like buying a home, getting married and/or starting a family. This is an exciting time, but for many it can also be a financially draining time. You should try to continue to save something into your ISA, but make sure you don’t forget about your pension.
A pension is essential for funding your retirement and should not be overlooked. Auto-enrolment has made starting a pension much easier as all employers now have to have a workplace pension scheme in place. Take advantage of the income tax relief of a pension as this will compound over the years.
In your 40’s and 50’s: Don’t forget to consider care costs
When you reach your 40s, your income may peak and plateau. However, your expenses – housing, education, transport and child care – will only increase. Make sure you save enough and that you are saving regularly. It is important to remember that you are planning for a life after 65 and you need to review your investments to ensure they suit your saving goals. Depending on your tolerance for risk, make sure that you are not being too conservative with your asset allocation.
Crucially, do not ignore the issue of care. We are now expected to live 20 or 30 years longer than our selected retirement age and it has become more likely that we will need specialist care in our later years. No-one wants to end up with little choice as to how or where they are cared for. Planning ahead and putting some savings away now, will give you peace of mind. It will also ensure that you are not a financial and emotional burden on those nearest and dearest to you.
With life expectancy on the rise, it is now more important than ever to make sure that you avoid making such errors and consider your broader financial planning. Make sure you have the correct strategy in place to secure your financial future. You can seek advice from a qualified financial planner or decide to do it yourself. Either way, make sure you don’t ignore financial planning.
Maike Currie is associate investment director at Fidelity Personal Investing.