A no-regrets financial plan
This may not be the perfect plan, but it’s likely good enough for professionals starting out.
Everything seems to happen at once in your thirties. It’s the point at which the career (and earnings) of many successful professionals takes off, as they reach the ranks of partner in professional services or vice president or managing director in the corporate world. Family responsibilities often arrive at the same time. It can seem like you’re running to stand still. The task of sorting out your personal finances often gets stuck, never quite making it to the top of the ‘to do’ list. And the range of tasks can seem quite bewildering.
Based on work with new partners in professional services firms I developed what I call a ‘no-regrets financial plan’ for the first five years of partnership. This draws on the common themes that come up and is equally applicable to professionals in corporate roles. It’s not meant to be a perfect plan, but it’s one that is better than doing nothing, and if you do this and then come back and look in more detail in five years’ time, you should at least have a good base.
So this is a plan for someone who isn’t that interested in the details of investment and personal finance, and wants something good enough. This is not for the investment strategy enthusiast or budding property mogul. It is unlikely to be the best plan for you — you should always take financial advice if you’re not sure what to do. But it’s a decent starting point for you to build on.
I’m going to take the situation of someone in their mid-thirties with a partner and young children, who own their house with a mortgage.
So here goes.
1. Get protected
Make sure you’re protected against financial disaster. Do this first. Now. Immediately. Do not delay. Without this step, your plan is like the straw house in the story of the three little pigs. You can read more about this step in my article What is financial protection?:
- Write wills.
- Set up lasting powers of attorney.
- Review benefit nominations for any pensions and life insurance policies you hold privately or through work.
- Ensure that you and your partner have sufficient income protection insurance either privately or through work in case you become incapacitated and unable to work.
- Ensure that you have appropriate life assurance for you and your spouse.
- Consider whether you need critical illness insurance.
You can go to a local solicitor to write your wills and do your lasting powers of attorney, or you can use a low-cost online provider such as Farewill (other services are available). You may want to consider putting in place a trust to receive any pension and life assurance benefits as well as your estate in the case that you and your partner die, leaving your children orphaned. This can be complex and requires specialist legal advice.
There are specialist regulated financial advisers such as Lifesearch (again other providers are available) who can advise you on getting the right insurance cover.
I have not used Farewill or Lifesearch and so cannot recommend them or vouch for them. Nor do I have any affiliate relationship with them. However, they are recommended by the legendary personal finance podcaster Pete Matthew (who does have an affiliate relationship with both organisations).
2. Create a financial surplus
Save half what you earn. Try to resist lifestyle ratchet. As your earnings increase, and you accrue children, it’s really easy to let your expenditure increase as well: massive house, more expensive holidays, swanky car, nanny, private school fees…the list goes on. Before long all that extra income has been lost in extra expenditure and you have no surplus.
You have a fairly short peak earning career — typically 15 to 20 years. You need to save and invest enough in that time to last you another 40 to 50 after that. Take it from me, you won’t want to be facing a sudden drop in standard of living when you leave work, so you need to figure out a level of consumption that is sustainable over your lifetime.
To make the numbers add up, this is going to mean you saving half to two-thirds of what you earn each year over that career. In other words, you have to limit what you spend today to between one-third and one-half of your net income. The exact numbers are going to depend on your earnings profile, existing savings, how long you work, desired income, investment returns and so on. It might be a bit back end loaded if your income projection is steep. But it’s best to start as you mean to go on. It’s really important to create a large gap between your income and expenditure as you go through the inflexion point because it can be tough to claw back later.
- Open an investment platform. (Or two, if you’re worried about what would happen if one went bust.) Investment platforms are run by the likes of AJ Bell, Hargreaves Lansdown, Interactive Investor. Some are run by investment providers such as Fidelity and Vanguard. Which? do a review of platform providers. Make sure it’s one that enables you to open all the investment vehicles you’re likely to need:
- Lifetime ISAs.
- Pension or SIPP.
- General investment account (this holds funds or stocks in similar way to an ISA except that you pay tax on the income and capital gains).
- And for your children: junior ISA and junior pension/SIPP.
- Check your mortage overpayment terms. Variable rate mortgages can normally allow you to overpay without penalty. Even fixed rate mortgages often allow you to pay an extra amount before penalties kick in. Alternatively, you can overpay in chunks at the end of each fixed period when you remortgage.
- Pay off any short term debt like credit cards and build an emergency cash fund of £50,000. Premium bonds are a decent choice for this, with the average prize rate giving you an after tax average interest rate of 1% at the time of writing.
- Maximise pension contributions for you and your spouse every year. You’ll likely be restricted to £4000 a year yourself if you earn over £300,000 a year because of the pension contributions taper. But your spouse, if they work, can contribute up to the lower of £40,000 or their earnings (unless they are also earn over £200,000 and so are subject to the contribution taper themselves). Even if your spouse doesn’t work they can contribute up to £2880 a year, net of tax, which the tax man increases to £3600.
- Maximise ISA contributions for you and your spouse every year. Each of you can invest £20,000 in an ISA, and if you don’t use it you lose it. This is a wonderful, flexible, lifetime tax-free savings opportunity.
So far, if you have a working partner earning more than £40,000 but less than £200,000, this could add up to £84,000 of pension and ISA contributions (more, if you’re not fully tapered). All free of the need to pay income and capital gains tax on investment returns.
- Invest all of this in a globally diversified, low-cost index tracker fund invested at least 75% in equities. Your investing time horizon, future income profile, job security and flexibility about how long you work all mean you should overwhelmingly be invested in higher growth / higher risk assets. To keep things simple you can use the same investment fund in your pension and ISA.
- Overpay your mortgage. Repayment of your mortgage offers you an unbeatable risk-free net of tax return equal to the mortgage interest rate. Not bad when rates on any other cash savings are close to zero. If you have a £2m mortgage over 25 years at an interest rate of 3%, then overpaying by £20,000 a year will reduce the mortgage term by five years and will reduce the amount outstanding after 15 years by around 40%, from ca. £1m to ca. £0.6m. A big gain in flexibility at that point.
- Anything else you have to invest, put in your general investment account, using the same globally diversified index tracker. Tip: use the accumulation units for the pension and ISA so that dividends are automatically reinvested; use the distribution units for your taxed general investment account to make the tax computations simpler.
5. Automate and standardise
- Wherever possible set up standing orders or monthly direct debts. Set aside a few hours the moment your bonus hits your bank account to make your investments. Don’t let it sit there burning a hole in your pocket.
Getting all of this set up will take you a couple of days. But you can then largely automate and forget. Don’t agonise too long and prevaricate. Your future earnings will dwarf the ups and downs of decisions you make today. As long as you are invested in the market with a good exposure to a broad spread of global equities at low cost, taking advantage of the tax-free savings opportunities of ISA and pension, you’re not going to go far wrong.
Don’t let the perfect be the enemy of the good. Act now and start building the investments so you can use the success you’ve earned to live the life you want to lead.
Nothing in this article should be taken to represent financial advice. It is generic commentary based on typical circumstances and not tailored to your own situation. If you’re not sure what to do, you should take financial advice. It’s perfectly possible early in your career to save yourself a lot of money by managing this yourself, perhaps with the help of a financial coach. Equally, you may decide it’s worth paying a regulated financial adviser to do it all for you.