How to create a financial plan

If you want to create a financial plan then there are some fairly simple and logical steps you need to take to get a reasonably accurate picture of how much money you need now or in future;

1. Write down all your goals and how much each will cost
2. List all your outgoings now and in future
3. List all your expected income now and in future
4. List all your current savings and investments

This is all easy stuff. Where it gets tricky is that you now need to factor in the impact of inflation on the cost of your goals, outgoings and income. You also need a method for calculating how extra money you will be able to accumulate together with some growth assumptions about the money you already have saved.

If you are a bit of a techie and have some time to spare, I'm sure that some of you can create working formulas in an excel spreadsheet which will then calculate whether you will have enough money in future. Altering the assumptions about growth (taking more or less risk), altering your future spending plans or altering the amount you save will all have an impact on this plan.

Alternatively of course you can save yourself some time (and worry) by consulting a good financial adviser or planner. He or she will also be able to show you the impact of market crashes on your life plan to help you decide how best to invest your money.

If you would like to find out more then you can contact me on Twitter @ReadingIFA or my website http://www.timeindependent.co.uk/ will be available next week. You could also ask a question here if you like.

Happy Planning!!

Tim.

How is wealth created?

Have you ever looked at the back of a £20 note? I suspect that all of you have, but if you look more carefully you will see the face of a gentleman called Adam Smith.

Now Mr Smith gets as much advertising space as the Queen (whose picture is on the other side in case you hadn't noticed!) because whilst he lived in 18th Century England he was possibly the greatest economist of all time and wrote a book called the Wealth of Nations.

In that book he details "How Wealth is Created" and once you truly understand this you can stop making investment mistakes and taking risks that are not worth it, whilst taking some that are. He explains that in order to create wealth you must have four elements.

Natural Resource
Intellectual Property
Skilled Labour
Capital (Finance)

So if we take Gold as an example of a Natural Resource you then need somebody with the knowledge of how to extract it from the ground (Intellectual Property) and in turn he would employ a skilled labourer to mine it. What he now needs is financing or a Capital injection of cash. Once all of this is in place the mine can be built and the miners employed and the gold extracted and sold to generate more cash to make the whole process keep turning.

This process is known as Capitalism and any investor taking part in capitalism is owed a return from the profits made on the sale of the gold. Now the mine owner can either get his Capital from the bank (and pay hefty interest) or he can get it by selling shares in his company to you and I. If we buy those shares we now own some of the company and if it makes a profit so will we.

So an investor looking to create wealth must take part in capitalism as it is the ONLY way that money can be made. Obviously you wouldn't want to invest all your money in one Gold mine, but by spreading your investment you can reduce risk. I will tell you how to do this another time.

You can find out loads more about Adam Smith at http://www.adamsmith.org/

How to get the taxman to pay off your mortgage

Yes, it's possible and relatively simple, but you do need a bit of time.

First of all you need an interest only mortgage. Secondly you need a pension plan that allows you access to a cash lump sum at retirement. A standard personal pension or SIPP will do.

You will need to maintain interest payments on your mortgage and simultaneously make contributions to your pension plan. For added oomph (that's a technical term) you might be able to get your employer to contribute as well. Anyway, contributions to your pension (within your annual limit) attract tax relief at your highest rate of tax but even for lower rate tax payers you get a minimum 20% tax relief. This is based on the gross amount you pay in. So for example if you pay in £100 per month then £20 of that comes from HMRC and only £80 comes from you. Or put another way, if you pay in £80 yourself, it turns into £100 instantly. That's a 25% return which is guaranteed, now where else can you get 25% return just like that?

If we look at a £100,000 mortgage example somebody needs to build up a fund of £400,000 in their pension. This is because under current rules you can take 25% of the fund anytime from age 55 (whether you retire then or not) tax free! This 25% is enough to pay the mortgage off. Now bear in mind that for every 80p you put in HMRC currently gives you 20p (25% extra) this means that HMRC has effectively paid your mortgage off for you, which is quite neat!

If you've already got some pension funds built up you could use these as a head start!

Clearly, you will need some proper advice from a qualified financial adviser before starting something like this, but having paid the mortgage off, you still have 75% of the fund left over to help with your retirement plans!

Which do you prefer or dislike ...... Recruitment or Estate Agents?

Since leaving SFIA and starting my own company I have been inundated with messages on LinkedIn inviting me to connect with people.

Wow, great you might say until I then tell you that all these connections (without exception) are recruitment agents trying to make some money out of my recent job move. To me this doesn't make any sense, because I've already moved......so you're all a bit late...D'oh!

I've actually not got anything against either of these professions as I used to be an Estate Agent (there you go...I've said it in public!) and I've been helped by several genuine recruitment agents. However, when these people try to contact me by claiming to be my friend when I don't know them from Adam it really gets my back up.

If you want to contact me genuinely, pay for the professional version of LinkedIn like everyone else has to!

I would like to start a poll on this one for a bit of fun. Considering most of us question the morality of animal testing I thought maybe we could use "agents" of some description instead as there seem to be more of them and I for one feel less guilty about experimenting on them. So should it be "recruitment or estate" agents we use for these experiments? Tell me why and then ask your friends to tell me too!!!

How can I save money on University Fees?

With the cost of University fees set to rise dramatically many parents are asking themselves this question.

My advice would be this plan early! Having said that of course, no planning done 18 years ago would have prepared you for the massive jump about to take place, so what do I do now I hear you ask!

Well the first thing I would suggest is to take the maximum student loan you can. This is because student loans are provided at a very low interest rate equivalent to inflation and therefore effectively interest free. They don't have to be repaid until the student is earning enough to start repaying and so there's less risk that your prodigy will finish their pre funded expensive art degree and then not get a job and repay the favour (nothing against artists!)

Secondly, taking this loan and repaying it slowly will be a very effective way of buying you some time. Time which you can now use for Planning!

So now of course the question is how best to repay the loan. This is the easy bit really as it can be paid off very slowly from future income, by a lump sum repayment or some kind of savings plan. There are so many options here that it really is just a case of finding the most tax efficient method and maybe by making additional pension contributions you can generate enough tax relief to cover the whole loan and so in a roundabout way you get HMRC to fund the entire cost for you. Now how nice would that be?

How to make your kids Millionaires

Hello Everyone, I thought I'd share a little secret with you about making your kids rich. If like me you've got children coming out of school now (or in the next few years) then you might just be interested in this. Inflation has averaged 5.6% per annum since 1949 and so getting a measly 1% on your savings isn't going to cut the mustard! You could try gilts at 7.4% or UK Core stocks and shares at 12.1% per annum average since 1956, but the real action is in UK Value Stocks which have delivered a whopping 16% per annum average over the same period of time.

This means if you start a pension plan for your kids now (which they can carry on with later) then £100 per month could give them over £1,000,000 before they reach the age of 50....by 60 they'll have over £4,750,000 which is staggering! You can do the maths yourself in Excel but I've already done it for you. You just need to know how to access Value Stocks at the lowest possible charges.

If £100 per month was all public sector workers had to pay into their pension funds then the news wouldn't be full of proposed strike action!

Money does funny things to people!!

An ex-soldier with Post Traumatic Stress has been deemed mentally incapable of fighting a court case over his grandmother's will. At 42 years old he was evicted from the house where he had lived for most of of his life because the house had belonged to his grandmother when she died in 2008. Since then he had been locked in dispute WITH HIS OWN MOTHER about the will because his GP told him he lacked the mental capacity necessary to fight the probate case against his mother.

A decision has BEEN MADE WITHOUT HIM to split the proceeds of the house. This outcome leaves him homeless and penniless once the predicted legal fees are deducted. He was given no warning that bailiffs would be arriving to evict him.

Should a person be deemed to lack mental capacity based on the say so of just one person and lose all rights to make decisions about their own finances or welfare?

Why is it that seemingly the closest of families and friends destroy each other when money gets involved?

I'd be really interested to here you thoughts.

Tim.