Securing Your Financial Future in 2024
Securing Your Financial Future in 2024
What are some of the things that we are most afraid of or most dread when it comes to money? What is lifestyle creep? How to plan for your finances in 2024?
In this episode of The Wallet, I interview Laura Newman, Head of NatWest’s Specialist Client Advice and Investment Services. We discuss the financial challenges and opportunities for 2024, such as inflation, interest rates, lifestyle creep, and wealth management. Laura shares her insights and tips on planning, overcoming obstacles, and growing wealth.
#AD: This episode is sponsored by NatWest Premier. Whether it's discovering ways to make your money grow, or planning your next new goal, your Premier Manager will help take your money to the next level so that it serves all your needs.
***
You can listen (24 min) and subscribe here:
***
Understanding the Financial Landscape
Presently, everyone is impacted by rising inflation and rising interest rates, albeit they are starting to come down. It impacts different groups in different amounts. Affluent people are more protected from it than the vast majority of Britons. However, they've most likely never seen these high-level interest rates before, and now need to make changes with how they manage their finances and be more financially resilient. Budgets will be a lot tighter for everybody across the country, and people are expected to buy fewer and cheaper items this Christmas as the cost of living prices force many just to rein in on those celebrations, which sometimes isn't a bad thing.
Practical Tips for Managing Finances This Christmas
The holiday season is just around the corner, and with it comes financial pressures. It’s important to try to have a more sustainable and budget-friendly holiday season. For example, embrace the "less is more" approach, and encourage thoughtful and meaningful gifts over lavish expenditures.
Open communication with family and friends about expectations and embracing shared experiences becomes crucial. There's tremendous pressure to please everyone with lavish gifts, but sometimes the simple, more thoughtful ones provide better memories. Ensure you speak to your family and your friends, and manage expectations. Perhaps find something different to do, say as a collective experience or an outing that everyone can share. Something that's really quite fun is Secret Santa. It limits the budget, it creates an experience of fun and laughter. We shouldn't overspend as the January blues are hard enough and facing huge credit card bills post the lavish Christmas could actually set you on the wrong path for the new year in 2024.
Planning for the New Year
As the festivities wind down and the new year beckons, we should consider the importance of proactive financial planning. Laura recommends starting the year with a budget analysis and aligning financial goals with savings targets. The 50-30-20 rule becomes a guiding principle, with 50% of income allocated to needs, 30% to wants, and 20% dedicated to savings. It's also very important to think about any debt that you currently have and to pay down that short-term debt or refinance at a more competitive rate.
Overcoming Financial Literacy Challenges
Financial literacy and the stigma associated with not knowing enough about managing money is a persistent challenge. We can feel embarrassed that we don't know enough about managing our money. It’s really important to have a good relationship with our bank as they can explain things clearly and in simple terms without the expectation that we would need to understand everything. Remember that no question is a stupid question.
Debunking Investment Myths
The first myth is the belief that investing is always the first savvy move. However, it's advisable to prioritise paying off debt first, as interest charges often outweigh potential investment gains. Another crucial aspect is having an emergency savings fund, equivalent to three to six months of your net income or fixed living expenses, to ensure you have enough set aside for unforeseen circumstances.
The second myth is the misconception that you must be a stock market expert. It's important to seek advice from experts in the field and engage in financial planning to receive guidance tailored to your personal situation and financial goals.
Another myth revolves around the idea that investing is akin to gambling. While investing always involves some risk, not all investments are high-risk. Each individual has a different comfort level with risk, which is why Natwest assesses a client's risk profile during financial planning. When investing for the long term, like retirement, taking a bit more risk may be feasible, as investments have more time to recover from market downturns.
The fourth myth pertains to the notion that investing is free. Regardless of whether your investments have a good or bad year, costs will always be involved. It's crucial to ensure you perceive the value for money in the services you receive. At Natwest, they provide transparent, flat fees for advice and various investment options, some with lower costs. Understanding these fees is essential, as they can impact the returns you receive.
There's also a common misconception about timing the market. Success is not about timing the market accurately. During market downturns, the instinct to panic and sell investments may arise, but sticking to your original investment goal allows you to weather financial storms better. Maintaining a diversified portfolio is also an effective way to protect against the impacts of market fluctuations on your investments.
Moreover, the adage holds if it sounds too good to be true, it probably is. Cryptocurrency trading, propelled by enticing advertisements on social media, has lured individuals with promises of highly attractive and risk-free returns. However, the reality often veers towards scams. To navigate such situations, it is recommended that individuals ask themselves three critical questions:
Firstly, are you feeling pressured or coerced into a particular investment?
Secondly, is the entity in question registered with the Financial Conduct Authority?
Lastly, and equally importantly, have you consulted with a trusted individual who can help you discern potential red flags? These are all very important questions to consider.
Gender Dynamics in Wealth Management
As societal dynamics evolve, traditional gender roles persist in many households, with men often taking the lead in managing finances. However, witnessing a positive shift is encouraging as more women actively seek to enhance their financial literacy—a development we all wholeheartedly support.
Past research reveals a confidence gap among women in financial matters, resulting in disparities in savings, investments, and pensions. While historical gender pay gaps and career breaks for family reasons contribute, a significant factor is the lack of confidence and a conducive environment for women to seek financial guidance. The financial industry is making strides in attracting more female advisors, fostering a safer space for women to pose questions.
In investing, women often lean towards a cautious approach. To tackle the lasting effects of breaks or reduced work hours on pensions, it's crucial to address the pension gap. While the details differ for employees and self-employed individuals, practical strategies like contributing during maternity leave or negotiating extra contributions upon returning to work can make a difference. Including a percentage share of a partner's pension for potential future events, like divorce, adds another aspect to financial planning.
While challenges exist, proactively addressing these factors and leveraging available options can empower women to navigate the intricate landscape of wealth management more effectively.
Mitigating the Pension Gap for Women
While it may be challenging to address these issues outright, there are several considerations to bear in mind. For those who are employed and have been automatically enrolled in their employer's pension plan, it's a good idea to keep contributing based on the pre-maternity leave salary. If you are self-employed, the situation becomes more complex, requiring decisions about the duration of maternity leave, whether to continue contributing, and to what extent.
When you go back to work, you can choose to add more money to make up for any time off without pay. Importantly, when you do this, your employer also has to contribute, making it an extra investment. If you decide to work part-time with a lower salary, your pension grows more slowly.
Moving forward, it's important to consider broader financial aspects: state pension, national insurance contributions, child benefit, and explore opportunities for additional voluntary contributions.
Mitigating the Pension Gap for Women
For individuals who have embarked on their investment journey, it’s important to do so via a diversified fund or portfolio managed by professionals. Regularly reviewing goals and objectives is crucial, particularly for different time horizons. You can tailor your risk approach based on the investment's purpose, whether for short-term goals or long-term retirement planning.
Protection
Financial protection is often neglected in wealth management but holds significant importance. Unforeseen changes in circumstances can jeopardize one's ability to maintain their lifestyle. Consider a scenario where a 51-year-old business owner with substantial income, supporting two children in private school, faces a sudden financial setback. Despite having a mortgage-free home, the family is forced to leave the house, and the children can no longer attend private school due to financial constraints. This example underscores the vital role of protection as a cornerstone in comprehensive financial planning.
Lifestyle Creep
A common trend that we see happening more often is the "affluent impostor syndrome." Despite being in the top 2% income bracket, high earners often feel their salaries are insufficient or don't consider themselves wealthy. This phenomenon is attributed to lifestyle creep.
Lifestyle creep refers to the phenomenon where discretionary spending on nonessential items increases as the standard of living improves. Over time, luxury goods and discretionary expenses evolve from being choices to perceived necessities, almost a right rather than a want.
People may dip into their savings to maintain their elevated lifestyle during these situations. Unfortunately, this can lead to the depletion of savings as they persist in living beyond their means. When overall costs rise, affecting areas like mortgage rates, energy, and food, the impact is felt as a strain on what is now considered essential expenditure, contributing to a sense of not being wealthy, despite residing in the top 2%.
Final Thoughts
It's never too early to start. It's crucial to embark on the budgeting process with a clear understanding of your goals and objectives. Sitting down with an advisor who can engage in comprehensive financial planning, and scrutinising every facet of your financial journey, is essential.