Things I Wish I Knew When I Was In Private Practice.
Since I qualified as a financial planner over 6 years ago, I have learned quite a few skills and tips that I now recommend to my clients and wish I had known when I was a solicitor in private practice.
As the majority of my clients are from a legal background I have listed the top nine pieces of advice I find myself giving to my clients.
1. Pay yourself first
With all the direct debits, bills and subscriptions going out each month I believe it’s important to remember to ‘pay yourself first!’ This includes setting a sum aside to come out of your account each month for savings and investments – otherwise it is easy to spend almost all your income each month. As we are all so busy with work and other commitments, I recommend automating the process by setting up a standing order so you won’t need to manually make the payment each month. One thing I noticed when working as a solicitor in London is that time flies! One year quickly turns to 3, then 5 and 10. Even if you set small amounts aside, the time will pass and you will soon see the benefits of compounding.
2. Take advantage of pension automatic enrolment
Automatic enrolment is a Government initiative to help more people save for later life through a pension scheme at work. Auto enrolment was not in force when I was in practice but it is now. It makes it compulsory for employers to automatically enrol their eligible workers into a pension scheme and also pay money into the scheme. So if you are an employee you are effectively receiving ‘money for free’ because your employer is making a contribution too. Setting aside even small sums of money at an early stage of your career will also help to put you into the mind set of saving for the future. The great thing about pensions is that the government will top up your fund. So a higher rate taxpayer contributing £80 into a pension will receive £20 tax relief at 20% boosting the overall contribution to £100. An additional £20 can then be claimed through their self-assessment tax return which reduces the overall cost to £60. So the £60 contribution is boosted to a gross contribution of £100. In addition to this, because you can’t access the fund until the second half of your 50’s, there is plenty of time for the fund to grow over the years and you also will benefit from compounding.
3. Set aside an emergency fund
Life has a habit of throwing curve balls! Having an emergency fund in place should an unexpected bill arise can make it less painful when it inevitably happens. I recommend setting aside between 3 to 6 months’ worth of expenses. This will help to avoid using expensive credit options to pay for unexpected bills.
4. Protect the downside
The plans you may have for the future will likely be contingent on you continuing to work and earning a salary until retirement age. This period of time is the ‘engine room’ of your future finances. If you are unable to work due to illness or accident, any plans you may have could be severely disrupted. Most associate solicitors’ employment contracts provide only the statutory sick pay level of remuneration should they experience an accident, illness or injury that prevents them from working. Statutory sick pay is £92 per week for 28 weeks *, after which it’s up to you to meet your own expenses. Think about how you would pay the bills if you were unexpectedly off work for more than six months? Putting an insurance policy in place that pays out a level of income that, at a minimum, will allow you to continue to pay your living expenses is a must.
5. Don’t wait for the ‘right time to invest’
It is easy to put off making the decision to invest by saying that you are waiting for the right time or the right market conditions. But there is never a right time to invest; don’t try and time the markets by predicting when is best to buy or sell. The key to investing is the time you spend in the markets and not your timing of the markets. Market falls are hard to predict and strong returns can often follow the worst returns, so the best advice is often to stay invested. A study by Bloomberg ** compared annualised returns over the last 20 years by staying fully invested over this period compared to being out of the market for the best 30 days. The former approach provided an annualised return of 6.26% compared to a minus 1.05% return in the latter. The right time to start investing as right now! The longer you remain invested the better so once you have selected the appropriate fund leave it untouched for as long as you can to reap the rewards.
6. Let compounding work its magic
It is said that Albert Einstein described compounding as the eighth wonder of the world! Put simply, compounding is the growth on the growth of an investment. As mentioned above, the longer you leave your investment untouched the more time compounding has to work its magic and in turn increase the sum of your investments.
7. Get on the property ladder as soon as possible
It has never been easy to get on the property ladder especially working in the London area. The gap between earnings and property prices has been widening for years3. However, compared to other types of borrowing, the rates on current residential mortgages have remained low over the last 8 years. And in terms of the cost of owning your own home compared to renting, research by Santander states it is now 18% cheaper per month to buy a house than it is to rent. Personally, I found that just getting a foot on the property ladder even for a small flat meant that I was paying much less rent in addition to the capital growth on the property. This stood me in good stead in later years when the capital growth made it easier to scale up and move up the property ladder.
8. Take professional advice
I believe that it is essential to take proper advice to help you plan for your financial objectives effectively. When I initially set up my own legal business I used the services of an accountant to certify and submit my accounts. I was advised that one method of reducing the company’s corporation tax bill was to invest in a pension and I was recommended to set up a pension holding cash. I followed this advice but soon came to realise that a cash holding would not provide anywhere near the growth required to build up my pension fund to the level required. The important lesson for me is to approach appropriate professionals for the most suitable advice – an accountant is not always the best person to give advice on your financial future. If you want to make plans for your financial future you should consider speaking with a financial adviser.
Ideally your chosen financial adviser should be independent, in other words should not be tied or linked to any particular product provider. They should also have access to all financial products in the market place and not just offer products from a panel of providers. Finally, I believe the adviser should be a ‘financial planner’ rather than a ‘salesman’! This means that the adviser should not be driven by the aim of selling products, but rather by making sure that the products and plans put in place are aiming to meet the client’s objectives. This can sometimes be achieved by ‘moving round’ or ‘upgrading’ existing investments. I believe it’s key your adviser uses lifetime financial planning software. This software visually shows you what will happen to your finances over the years based on agreed assumptions that are tailored to you and your circumstances. This will provide you with step by step guidance on how you can achieve your financial objectives.
9. Increase your financial knowledge
There is a lot of financial information available and it’s easy to get bogged down by it all. Don’t make the mistake of being distracted by the headlines and press releases about the market – these can be aimed at selling newspapers and not necessarily to help you with your financial future. I recommend staying away from the weekly ‘hot share tips’ and information in the press about markets going up and down and instead stick to fundamental principles of investing. I found that reading a handful of books helped when starting on the path of financial education. I recommend reading: – ‘Rich Dad, Poor Dad – What the rich teach their kids about money that the poor and middle class do not!’ by Robert Kiyosaki; and – ‘The one page financial plan’ by Carl Richards. I believe these are two great starter books into the world of personal finance.
Levels and bases of reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.
The value of your investments can fall as well as rise and you may not get back the full amount invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
What you get back at retirement cannot be guaranteed and will depend on how much you pay in, investment performance and interest rates when you retire.
Wealthwise Financial Solutions Limited is authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate taxation and trust advice.
* Source: HMRC https://www.gov.uk/statutory-sick-pay
** Source: Bloomberg- A guide to the Markets – UK, Data as at 31/12/17 3 Source: Office of National Statistics (ONS) Report, April 2018 https://www.ons.gov.uk/peoplepopulationandcommunity/housing/datasets/ratioofhousepricetoresidencebasedearningslowerquartileandmedian