Small Increases in Income Make a Big Difference!

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When considering whether to move to a new employer, many feel that it is important to ensure that they maximise the amount of increase in income that they achieve.

Many would not consider moving to a new job for just £1,000 or £2,000 extra per year.

But it is the point of this article that a small increase in income can make a BIG difference.

When we consider the normal income and expenditure profile for a family we can roughly divide it’s expenditure into “fixed” and “variable”. An example of a fixed expense would be a rent or mortgage payment. It is generally fixed in relation to an increase in income – if you earn an extra £2,000 per year then generally you may stay living in the same property. A “variable” expense on the other hand is an expense which does or can change with income – for example – entertainment – if you’re earning more you may have a tendency to go out for meals, cinema, holidays more, therefore spending more on entertainment as your income rises.

So having considered this, we can see that all people have “fixed costs” and “variable costs” of living. The difference between total expenditure and total income is therefore what we like to think of as “disposable income”.

Having assessed your income and expenditure (see this article on cashflow forecasting) you will arrive at a figure for your “disposable income”.

For example, say your monthly take home pay, after tax and national insurance is £2,000, you have fixed costs of £1,200 per month and variable costs of £500 per month.

This gives total expenses of £1,700 per month and a disposable income of £300 per month.

Now let’s say for arguments sake that you could move to another job which earns you just another £100 per month after tax (£1,200 per year). Many would not consider taking this course of action, yet when we consider this in relation to your “disposable income” you have now seen an increase in your “disposable income” of £100 per month, from £300 to £400 – a 33% increase in disposable income!!!

This is an example of “leverage” where a small change in one variable results in a large change in another variable.

Now you might not get very excited about an additional £100 per month, but what if it was an extra £250, £500, or even £1,000 per month – what could you do with that additional income? I’m sure you could let your imagination run wild on this one.

Could you move to another job for an increase in income, or do something in your free time to earn more money????

Retirement is an income, not an age

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It occurred to me recently with all this talk about the need to raise retirement age in the UK due to our ageing population, that many people have got it wrong.

They are thinking of “retirement” as an age, yet in reality it should be an income – when you have sufficient assets to provide you with enough income to replace that which you earn working the 9 to 5, then you are in a position to “retire”.

The overall goal for financial planning in the current day and age must surely be to try and attain “financial independence” in our own lifetimes. To this end, we should endeavour to accumulate sufficient assets around us to provide enough income to enable us not to have to work for a living.

So with this in mind, give consideration to the amount of “income” you would need to retire today – do you really need the full amount of your take-home pay or, with careful planning and spending, could you live on less than you currently receive.

I guess the answer to this must be “yes” – with retirement comes one of the greatest assets we can ever attain – the asset of time.

With time on your side, you can plan your life and expenditure better – you have time to browse for bargains at the supermarket, to shop around for a better deal on your house or car insurance, to cook your own meals instead of buying “expensive” pre-prepared ones.

Start by analysing your income and expenditure – read this article – cashflow forecasting – planning income and expenditure.

Deflation – it’s official!

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What is Deflation?

A deflationary climate has returned to Britain for the first time in nearly 50 years.

The Retail Prices Index (RPI) measures a theoretical basket of goods and compares changes in the price of the whole basket over time. For the first time in five decades RPI was lower over a 12 month period.

In March 2009 RPI was 0.4% lower than 12 months earlier in March 2008. In the short-term delfationary pressures could make the recession we are currently going through worse than expected as the general level of prices continues to fall.

Some people argue that falling prices is generally good for consumers, and therefore the economy, however if these deflationary pressures become entrenched over the medium term then this will actually hurt the economy as consumers will effectively stop buying products today in the hope of even greater savings to be made tomorrow.

The Office of National Statistics has said that the largest constituent part of the “basket” which has pushed prices lower was gas and heating oil bills, with falling vegetable prices over the last 12 months also making a contribution.

Aren’t Falling Prices a Good Thing?

Not necessarily as it affects some consumer groups more than others. For example, pensioners receive a State Pension which is linked to RPI – they are therefore seeing little increase in the value of their State pensions. To compound the problem, the basket of goods which the average pensioner purchases is rising in price above inflation – in real terms therefore pensioners are becoming worse off.

Pensioners who depend on their savings for additional income over and above their pension income are also suffering at present from low interest rates on their savings accounts.

Pensioners are likely to see their pensions increase by no more than £2.40 per week next year. State pension increases are set with reference to RPI figure in September which was 2.5%. The likelihood is that State pension will increase by £2.40 per week to £97.65.

The other losers in a deflationary economy are those burdened with debts – they will suffer with the debt-deflation trap – which would see the “real” value of debts increasing as the general level of prices of all other items falls.

Deflation will also affect workers as they are unlikely to receive wage increases – business owners and managers will argue that the deflation of prices in the economy is providing a boost to “real” wage values without the need to put their hands in their pockets.

 

RPI and CPI

The Government’s preferred method of measuring prices is through CPI (Consumer Prices Index) which again uses a theoretical basket of goods and considers the change in prices of these goods and the relative weightings of each good sector within the basket. CPI excludes housing and mortgage costs.

At present CPI is running still in the positive at 2.9% per annum.

10 Great Reasons to Write a Will

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In our previous article we considered the basics of will writing, setting out the key people involved in the writing and execution of a Will.

In this article we will consider the REAL benefits to be enjoyed from ensuring you have a properly written Will.

10 Great Reasons Why You Should Write a Will

1. To allocate assets between different people.

You may wish to leave jewellery to a niece, or promised a grandson your war medals. A Will can formalise all these gifts and help prevent family arguments – remember this – family and money rarely mixes!

2. If you’re not married then you need to make Wills.

There is no automatic transfer of assets between couples who are cohabiting. Other than jointly owned asset which would pass to the surviving owner on first death, in law, all other assets could pass back to the deceased’s family under intestacy rules. In practicality though it is unrealistic to expect your deceased partners family to come asking for his/her DVD collection but a Will formally arranges your affairs after death and avoids problems later.

3. Leave assets to an ex-partner.

It could be that you have now remarried or are living with someone else. A Will could be used to leave assets to an ex-partner, for example, they may have made a large gift to you during your relationship which you would like to return to them in the event of your death.

4. Reduce the amount of Inheritance Tax you pay.

In the current tax year we can each leave an estate of up to £325,000 (2009/2010 tax year) with immediate liability to inheritance tax. Anything we own, over and above this £325,000 Nil Rate Band is chargeable to Inheritance Tax at a rate of 40%. A Will could be written to leave up to £325,000 to be split equally between children or held in Trust for their benefit. Under a normal “British” Will it is usual for all assets to pass between husband and wife. It might be prudent to still include a will trust to hold £325,000 for the benefit of your children – leaving all your assets to your spouse could see that money all eaten up in care home fees – it is vitally important that you take legal advice in this respect.

5. A Will can be used to make assets skip a generation.

It may be that your own children are financially successful in their own right. Passing assets to them on your death may be of no benefit and could simply compound their own Inheritance Tax problems later by artificially expanding their Estates. If this is the situation then why not leave your Estate to benefit your grandchildre, or even great-grandchildren if that is the case.

6. A Will can be used to set up a Trust.

If you are fortunate to have a very large Estate you may choose to set up a Trust to benefit a local charity or support group in terms of providing them with a regular income. Seek legal advice if you are considering this course of action.

7. To avoid Intestacy.

If you don’t make a Will then the Government have already made one for you. These are known as the rules of Intestacy – you are said to have died “intestate” if there is no valid will at the time of your death. For example, if you are married and die with a spouse and children then your spouse doesn’t automatically get eveything – if your Estate is less than £250,000 everything goes to the surviving spouse. If the estate is over £250,000 the surviving spouse gets £250,000 and all personal possessions.

Half of the remaining estate is split equally between the children with the spouse retaining a “life interest” e.g an income from the remaining 50% with this 50% ultimately being split between the children on second death.

As you can see – assets being allocated in this manner can and does cause problems after death.

More information on intestacy rules can be found here – HMRC – Intestacy Rules

8. You need to appoint Guardians for your children – this is vitally important.

In the absense of a Will it would be the Courts/Social Services who decide where your children are best placed – and it might not be with the people you thought would look after and raise your children. By making a Will with Guardians named for your children you can avoid this uncertainty. You should also consider putting in place life insurance to provide for your children in the event of your death – consider this – it could be very difficult if one day two children turned up on your doorstep expecting to be looked after until they are 18 and there is no money there to fund them!

9. If you are separated but not yet divorced.

You should write a will with the will written in view of the divorde going ahead as there is a possibility in law that, in the event of your death, your asset could pass back to your ex-partner. Although you are separated, in the eyes of the law your ex-partner might be entitled to your Estate after your death!

10. If you have been married previously or you don’t trust/like your spouses family.

You might care to write your Will so that in the event of you both dying together your assets don’t end up passing to your spouse’s family. For example, if you were killed in a car crash, in the eyes of the law, the eldest person is deemed to have died first. It is possible that their Wills leave all their assets to their families – you could see your assets momentarily pass to your spouse before passing straight to her family. Is this what you want to happen?!

We hope this article was of some benefit in sparking an interest in writing your own will.

Will Writing – an introduction

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Why you need a Will

There are many reasons why it is prudent from a personal, as well family perspective, to ensure you have a suitably worded Will in place – and Will Planning is not just for old people either!

What is a Will?

A Will is your written instruction which formalises what is to happen with your estate, and your children, after death. It can be a shrewd tax and estate planning instrument when used correctly and there are also a number of reasons why you should write a will sooner rather than later. We will cover these further in our next article in this series. This article is an introduction to Will Writing.

There are several ways in which a Will can be written – you could use the services of a Solicitor, a Will Practitioner/Specialist, a financial adviser or even a “DIY” Will purchased from a stationers.

In order to make a Will you need to be of sound mind and over the age of 18.

What is contained in a Will?

A Will sets out the administration of your estate in the event of your death. In it you can state your funeral preferences together with details of any gifts to charity or the National Trust.

Individual items can also be named, for example, leaving jewellery to a daughter or military medals to a grandson.

The Will for the most part will deal with the distribution of your estate – these are all your worldly goods and possessions. It is common for married couples to leave everything to each other and then shared equally between children on second death – this is generally known as the “Great British” Will – and may or may not be the most efficient and effective way of administering your Estate.

Who is involved in the Writing of a Will?

As the person making the Will you are known as the Testator (Testatrix if female) and the Will will be witnessed by two individuals who are not to benefit under the terms of the will – these are the Witnesses.

In the Will you nominate a person or people to administer your Estate after your death – these people are known as the Executors and it is their legal obligation to ensure that your wishes are carried out to the best of their ability.

I have an existing Will – does it need changing?

It is important to ensure you review your Will on a regular basis as people’s circumstances do change and the Will previously written may no longer match your wishes.

In addition to this, on several occasions, during my time as a financial adviser, I came across situations where people simply do NOT have a valid Will – in one case for example, the person had received their copy of the Will back from the Solicitors office and had simply filed it away without signing and witnessing the Will – remember – you need to ensure you sign your Will and that this signature is witnessed by two independent witnesses for it to be valid.

Is it feasible to make my own Will?

Although it is possible to write your own Will it is always advisable to have your Will written by an expert, such as a Solicitor or STEP practitioner.

A word of caution – in many cases the person writing the Will may wish to add themselves to the Will as an executor – I would always err on the side of caution at this suggestion. This person would be acting in a professional capacity and therefore the level of charges which might be incurred could be an unknown. You could in effect be writing a “blank cheque” on your estate by including a professional to act as an Executor on your Will. Remember – the other people acting as Executors (e.g. family) can always bring in professionals to act, at an hourly rate or agreed cost basis, should the need arise.

Next article – 10 GREAT reasons for Writing a Will

Trusts – Protecting Wealth and Financial Planning

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Trusts – An Introduction

This article is an introduction to Trusts and how they can be used in financial planning to achieve your money and wealth goals not only as a tax planning tool but also to protect your existing wealth.

What is a Trust?

A Trust is any arrangement whereby one person(s) manages and looks after assets for the benefit of another person or people. It is a legally binding agreement and is covered by various Trust and Taxation laws as well as judicial precedent.

Who is involved?

There are three classes of person involved in the setting up of a Trust – a Settlor is the person who sets up the trust, normally to receive their own assets – the trust assets are looked after by the Trustees for the ultimate benefit of the Beneficiaries.

During the term of the Trust, the Trustees are the legal owners of the Trust assets but the Beneficiaries are the beneficial owners. It is the Trustees legal responsibility to ensure that all decisions made in respect of Trust assets are made in the best interests of the Trust’s Beneficiaries.

It is normally good practice to have more than one Trustee and in the majority of cases the Settlor will also be Trustee. In line with this, it is also possible to name direct individuals to be Beneficiaries under a Trust or this could be written into the Trust to cover a group of people – for example, “all my children who survive me by 28 days”.

How is a Trust set up?

A Trust is generally set up by completion of a Trust deed. This deed sets out the nature of the Trust, the Beneficiaries of the Trust and the powers and obligations of the Trustees.

In respect of life insurance policies generic Trust wording can usually be supplied by the life office to help the Settlors’ legal representative ensure that a correctly worded Trust is put in place.

Are there many Different types of Trust?

Yes – there are a number of different types of trust and they all have different purposes – further information on the different types is available from your Solicitor – the purpose of this article is to introduce you to the topic of Trusts and how they can be used in relation to your own personal financial planning. In future articles we will deal with some of the more common Trust arrangements in more detail

How are they used in financial planning?

Two of the most common uses for Trusts in financial planning are to protect assets from taxation or creditors or to ensure that assets pass to the correct beneficiary in the event of the death of the Settlor.

The majority of people reading this article may come into contact with a Trust arrangement through taking out a life assurance policy.

The Settlor, who is also usually the life assured, sets up the Trust using a standard wording provided by the life office (which it is advisable to get checked by a suitable qualified Solicitor) to leave the benefits from the policy (the sum assured) for the benefit of specific individuals.

A normal course of action would be for a parent to effect a life policy and place it in Trust for their children. There are several benefits to this course of action:

1. The sum assured on death is outside of the deceased’s estate and is therefore not normally subject to Inheritance tax.
2. The proceeds from the plan can normally be paid out quicker as there is no need to wait for probate to be obtained to allow release of funds. Usually provision of the death certificate and a copy of the Trust is all that is required.
3. It stops third parties accessing the funds which may not be what the life assured intended – it’s amazing who can “come out of the woodwork” when someone dies and there is money to be shared out!
4. It stops the sum assured being used to repay debts of the life assured in the event of the life assured dying whilst being insolvent or having large debts.
5. If the Beneficiaries are young children then the money can be held within the Trust and the Trustees would usually have the ability to make advances of the funds for the welfare and benefit of the children, whilst retaining the monies until the children are older and better able to manage their own affairs.
6. Grandparents could utilise a Trust to allow their assets to effectively “skip a generation” and be passed to grandchildren which is a particularly popular arrangement where their children are already wealthy in their own right.

What about Tax Planning?

Yes, Trusts can also be used for tax planning and in later articles we will discuss the various Trust planning tools available in the UK today. Gifts can be made into specific Trusts which provide an immediate saving against Inheritance tax; other Trusts exist to remove growth of investments outside of an Estate whilst still allowing the Settlor access to their capital.

Please add any comments below.

Needs and Wants – the Basics of Budgeting

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As with all topics, it’s best to start at the beginning with the simple steps first.

Sorting out Your Finances

In order to make decisions about what steps to take with the various aspects of your personal financial planning it is important to take a “snapshot” of where you are at at this moment in time.

A plan is just that – a plan – you decide on where it is you want to “arrive”, consider your current “position” , weigh up the various methods of getting there and choose the path which seems most appropriate to your current family situation, income profile, future employment prospects.

Where am I now?

There are three basic areas which you need to give serious consideration to which will help you formulate in your mind the starting point for your journey through your personal finances!

1. What do I OWN?
2. What do I OWE?
3. Who owes ME?

This will create a snapshot of your current “ME” position. In terms of what do I OWN – do you own your own house (what is its value?), what savings do I have? What investments do I currently have?

Basically, you need to consider all assets, either tangible or intangible.

Is a car an asset or liability? In one respect it is an asset as it allows you to travel to and from work, allows you to earn a living, saves you TIME not having to walk.

But in another respect it is a liability – you need to buy it, service the car loan, put fuel in it, maintain it, insure and tax it, then after several years and £1,000’s of depreciation you have to swap it in for a newer car.

After you have made a list of all your assets you need then to consider all your liabilities – just how much do you owe, how much is it costing to owe that money (interest rate) and is the amount you owe rising or falling over time?

Finally also consider all amounts owed to you – who owes you money? What is the prospect of it being repaid?! This money owed to you is an asset.

Finally consider all the “intangible” assets you own – these are not physical items like cars, jewellery, shares in companies etc. These are the skills, qualifications, knowledge, contacts and relationships – for many people when they are starting out in life these “intangibles” are considerably more valuable than the “tangibles”. In an ideal world, over time in order to build your wealth you need to follow this formula: –

“intangibles” + time = “tangibles”

4. How much cash is left over each month?

When you first start out on your wealth-building path you will generally start with very few “tangible” assets – you have skills, qualifications, drive and determination, perseverance etc. but you have very little in terms of assets – cash, investments, etc.

There are two main ways to increase your personal wealth – earn more than you spend and grow what you already own. Don’t count on inheritances as they may never come – the cost of residential care for the elderly will wipe out the majority of inheritances in the current economic and demographic climate.

Budgeting – Needs and Wants

Most people, us included, will have a set monthly income and expenditure. Have you actually analysed what you have coming in and going out each month?

It would be wise therefore to sit down and go through bank statements, bills etc and work out exactly just what you have coming in each month and what you spend it on.

The title of this article is “Needs and Wants” – all our expenditure can be split between being either a “need” or a “want”.

Accommodation – a “need” for all of us – as is food, clothing, water, heat and light.

“Wants” – these are all the other things – we may “want” the top package from our satellite TV provider – but do we “need” it?

The goal here is to identify all those items which you buy on a monthly basis which are “wants” and not “needs” – for every transaction simply ask yourself “Do we need this or do we want this?”

If it’s a “want” – ask yourself – should I spend my money on this “want” now which will give me some short-term pleasure or should I save the money so I can have more “wants” tomorrow????

This article links into the other article – “Pay Yourself First”

Please let me know what you think? Have you sat down and gone through and identified where you are wasting money each month – an increasingly important activity for many people with the “credit crunch” and current economic climate.

Pay Yourself First – the first step in wealth creation

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One of the key principles of personal financial planning and wealth creation is to live within your means. This does not mean “going without” – it simply means to only buy what you can afford to buy.

Pay Yourself First

“Pay Yourself First” is a principle of wealth creation which I first came across in the fantastic book on wealth creation “The Richest Man in Babylon” by George S. Clayson and is a principle which has been repeated so many times through the ages.

Simply put, every time you receive any income, take a portion off the top BEFORE you spend any of the money on anything else and save it or do something constructive with it.

The book talks about taking 10%, but I feel in reality you should start small, say 5%, and allow your lifestyle to adjust to your new level of disposable income before increasing the amount you save. If done in small increments, the amounts you save each month will not feel as “painful” – you are less likely to miss another £10 per month taken from your income, than you are £100.

For example, if you earn £30,000 per annum, in the UK today you are taking home £1,800 per month after tax and national insurance contributions. 5% of this would amount to £90 per month. If you invested this £90 per month, and achieved a return of say 4% per annum, after tax and all charges, which would be conservative, then after 5 years you would have amassed £5,966.

Now let’s be honest, this £90 is not money which would have been spent on necessities but is money which would most likely would have been “wasted” on non-essentials. Here are some of what I consider to be the worst value items which people genuinely purchase on a regular basis:-

  • Per-packed sandwiches
  • Bottled water
  • Newspapers
  • TV listing guides
  • Gym memberships (and then stop attending after a few months!)

I am sure if you analyse your own expenditure you will identify those areas in which you “waste” money.

Repaying Debts – a form of “saving”

Alternatively, if you are currently carrying any debts, such as credit or store cards, consider redirecting this waster money into repaying those debts. With credit cards charging considerably high interest rates, by repaying these first you will be earning a far better return on your money.

For your Consideration!

Buy and read the book “Richest Man in Babylon” – it is an excellent read and is not an expensive purchase.

It is a worthwhile exercise to analyse your income and expenditure to see exactly where the money comes from and goes to each month.

Consider setting up a standing order from your current account into a savings account – many banks these days offer online “electronic savings” accounts, which pay a higher level of interest than your current account – simply set up a regular payment to take some money from your current account and place it in your savings account each and every month.

The other benefit of these types of account are that you don’t need to visit the branch – saving both time and money.

The best time for this payment to be made is just after payday!!!

We would appreciate your comments and experiences on this topic – feel free to comment below.