Household Bills
The perils of emotional financial planning
Planning your financial future with your heart rather than your head can have a major impact on your long-term wealth.
It can be difficult to be objective about your personal financial situation, but according Nick Fitzgerald, head of financial planning at Brewin Dolphin, getting emotions mixed up with your financial planning can mean that you miss out on important opportunities and don’t fix mistakes as quickly as you could.
He says: “Emotional attachment to certain assets, fear of upsetting friends and family and even superstition mean that people do not fulfil their financial goals even if the desire is there.”
Here are the six most common mistakes Fitzgerald sees:
Misplaced Loyalty
Whether it’s the company you work for a business you built and then sold, holding too many shares or assets in a single company – no matter how much loyalty you feel towards it – could spell trouble.
Fitzgerald says: “Remember to diversify your assets and spread risk.”
Hiding from reality
Procrastination is common enough, but you have to face up to reality at some point. According to Fitzgerald this is particularly true where pensions are concerned.
He explains: “Claiming ‘it’s not worth starting a pension at my age’ is not a good enough excuse not to save for your future, particularly given the tax reliefs which come with pension contributions. While it is best to start saving for a pension as early as you can, it’s never too late.”
Avoiding discomfort
Discussing your own death – and what will happen to your estate after it – will never feel normal. But you can’t let superstition and discomfort keep you from providing for your loved ones. It’s vital to get over your fear and have the conversation.
Refusing to let go
From family heirlooms to the large home you raised your children in, some objects and assets feel too precious to let go. But if you want their value to stay in the family, Fitzgerald says, it may make sense to sell up and release the cash to facilitate inheritance tax gifting.
Panicking about the future
If you would like to give money to your children but worry about affording your living expenses, try to think clearly about the situation. Do you have more than enough to live on or are you just scraping by?
Fitzgerald says: “Mapping out your inflows and outflows with an adviser – and planning your future expenditures or liabilities -will help you work out exactly how much you need to keep and how much you can give away.”
Withholding trust
It may seem strange to trust another person with your assets, but if that person is your spouse you could be missing a major tax trick. Fitzgerald says: “Some clients fail to make full use of their spouse or partner tax allowances, which is one of the most common mistakes.”
If one partner is paying a higher rate of tax, transferring assets to the lower earner helps both partners – and the family as a whole.