Life-Long Financial Planning:
As the nation becomes obsessed with the state of the national economy, and the gross incompetence of the minister of finance and the governor of the central bank, it is necessary that households devise some form of financial planning strategy to take them through these tough times. For those people unfortunate enough to have lost their jobs, the practicality of maintaining their lifestyles, feeding themselves and looking after their families, must come top of the agenda. The first and most important thing to do is to sit down and draw up a list of household incomes and expenditures, what you earn and what you spend monthly or weekly. If your income is fixed, usually from a single source such as employment, then it is important that you go through your expenditure and prune it back as much as possible. Then ask what would happen to your family’s lifestyle if you or your partner were to become seriously ill or, heavens forbid, or even one of you die. If you have received a reasonable redundancy package, then look at clearing off some (most?) of your debt, such as credit cards and hire purchase. Also have a word with your mortgage lender of landlord and out them in the picture.
If you are lucky enough not to have lost your job, then a review of your finances is also essential, you may not be so lucky next time. I am still surprised that the unions or the government have not offered those being made redundant counselling or good exit financial planning. In fact, given that many of those made redundant, aged in their 40s, 50s and 60s, will never again get a job as most of us know them. One deal the unions should have negotiated with government was re-training opportunities for all those made redundant, from learning trades and crafts, to new disciplines such as computer repairs and book keeping. Getting the sack from a solid public sector job has brought to an abrupt end their substantive working lives as employees. From now on in they must live on their own ingenuity.
Life-Long Financial Planning:
Good financial planning goes beyond the emergencies that follow losing one’s job or a family tragedy. This is more so in the early stages of adulthood as financial planning is one of those essential things that does not appear on the radar of young people, who, as we have all done, believe they are invincible. But when the time comes and you are no longer the responsibility of your parents, is a good point to start thinking in a serious way about a job your financial security. One of the first, if not the first thing you should think about is protection cover. This is just jargon for saying that you must have proper insurance policies which are relevant to your current marital status and lifestyle. As pointed out, you do not need whole of life insurance which only pays out when you are dead. Beneficiaries may like you for it since it means they are in a position to inherit a relatively modest sum of money, and for that gift they may give you a good funeral, but that is no good to you. So, at that early stage in your life, you may need an endowment policy covering a period of 25 years or so, at the end of which you will receive a lump-sum – according to how the equities and bond markets perform.
Think of saving or travelling to work by pooling resources and forming a car club; with high petrol costs and the wear-and-tear on vehicles, four or five people travelling in to work in a single car will not only save money, but also the environment and reduce those grinding traffic jams. The same for dropping children off at school; meeting at a central collection point and sharing that burden will not only encourage the children to be friends, but will add to the economy by allowing parents to get to work much earlier.
You also need income protection at the very earliest stage, which covers you in case of serious illness (young people, especially men feel they are invincible), such as motor accidents, heart attacks, or even redundancy from your job. Good income protection will replace most of your monthly take-home pay, allowing you to pay your bills and maintain your lifestyle at least for a period after losing your job or becoming ill.
Always save for a rainy day. One great pleasure I have is a few years ago I was interviewed in BBC Radio Five Live along with Steve Webb, the current pensions minister, and Tory David Willetts, at present universities minister. One point I made was that the average worker should aim to save about 20 per cent of his/her take home pay; my memory is that both politicians disagreed. It is now a part of the savings vocabulary to talk about saving 20 per cent of earnings as long-term savings for a retirement income.
Another early essential is to start saving towards a deposit for a mortgage; home ownership is the greatest source of family wealth in the Western world. Most mortgage lenders calculate repayments on a daily basis, so it is important to ask if they offer offset mortgages – those are joint mortgage and current accounts. So, by having your salary paid in to the account, and any rainy day savings, you will be actually reducing the interest on your loan, which can save thousands of dollars over the lifetime of the mortgage. It is not a coincidence that in both North America and the UK homeownership accounts for about 70 per cent of homes. This is the wealth which, in the main, you will pass on to your children and their children.
Investing:
Investing is one of those things that middle class, professional people, whatever their earnings, are keen to do. Often they do so without getting any professional advice, in the mistaken belief that if they are accountants or lawyers they are expert at managing investments. Big mistake. The people who provide expert advice on life-long financial planning are financial advisers/planners. These are the people to discuss the state of your financial health with, the same way that you go to medical doctors for your physical health and lawyers for your reputational health and legal rights. It is always a good first step, to my mind, to start investing by joining or forming an investment club. In that way you pool your investments and share the good times and bad – investments can go up as well as down. Once you have gained experience you can diversify your portfolio by investing in other pooled investments. Going direct to a stockbroker or mutual fund managers to buy shares on the stock market is a game for the wealthy or riskier investors. First, you have to carry out due diligence and that is not as simple as it may seem. Even hardened investors often fail the due diligence test. Private pensions, or as I prefer long-term savings, also call for expert advice, especially during the accumulation phase, when you are building your pot. This is the period when you invest more in equities than in fixed income or cash, on the principle that money lost when you are in your 20s is not as painful as when you are five years away from retiring.
As you get older you rebalance your pension pot, gradually moving from the high-return equities – any investment that promises a high return means a high risk – more towards a more passive investment style, i.e. tracking a benchmark.
In the de-cumulation or drawdown stage, when you are about to take a pension, it is good to shift from equities to fixed income, such as gilts or corporate bonds and cash. Some people may even prefer to buy a conventional annuity, a lifelong contract with an insurance company in which, in return for an agreed annual income (which can be paid monthly or twice a year), a lump sum is invested with the insurance company. This income is based on an actuarial assumption: the estimated performance of the equity markets, your expected longevity, etc. If you do not live as long as the actuary estimates, then the remainder of your investment goes to the insurance company; if you live longer, then the insurance company is the loser. I find this contractually unfair and believe that the remainder of the pension pot should go to the annuitant’s estate.
Then you also have to think of long-term care: because you are living longer it does not mean you will be in good health. So, the best time to plan for those years when you are unable to do anything for yourself is when you are in good health. Also think about appointing a power of attorney, someone to look after your interest legally and not leave it to your loved ones. It is also a good time to write a will, it does not mean you are going to die, and plan your funeral.
Analysis and Conclusion:
The massive sackings by the government should be a wake-up call to the nation, no matter how wealthy, to put their finances in order. It is never too early, nor too late. One problem is that most insurance companies are dishonest and just see customers as people to take money from. For example, many of them offer few, if any, protection products, the most important insurance products for the average person. The main reason for this is not demand, since it is a product that must be sold, not bought, and the margins are much lower than life insurance and critical illness. It is a lot to do with ignorance. So, with the typical money-focused insurance company, life insurance and critical illness product development and marketing feature much more prominently in their development plans than income protection, which would naturally be of greater benefit to the ordinary working person. Another reason is the complexity of income protection: although initially the policyholder will know the percentage s/he could claim in the event of an incident which prevents them from working, the amount actually paid will be based on any full or part-payment received from the employer and any state benefits, both of which would be deducted from the final payment. So, before taking out protection cover, it is important to speak to your HR department and find out the company’s policy on sickness payments and what payments you would be eligible from national insurance. Then there is question of the policyholder returning to work part-time or in a lower-paying job with fewer responsibilities. The most complex area, however, is the insurance company’s definition of incapacity, which may at first seem simple, but it is not. Is the claimant incapable of performing his/her regular job, a similar job or a set of jobs?
The other great concern will be the quality of the personal underwriting, the assumptions on which decisions are made. Without regulatory competence, this, along with actuarial assumptions, will be two areas which would tie up the regulator and expose their limitations. In fact, there is a really powerful case for making income protection and critical illness cover compulsory for all working people, along the lines that all motorists must have compulsory road insurance.
Of course, there will be those who will say that Barbadians are already over-taxed, but sometimes you must protect people from themselves. Part of life is about managing disappointments and it is no good just feeling sorry for yourself if you have been sacked.
The key is to audit your skills and talents and work out ways of monetising them, of turning them in to ways of making a living. Some people develop a number of small products that combined give them a reasonable living: home-made cakes and pastries, in-house laundry, book-keeping, chauffeuring (why not form a car club to take people to work and collect them in the evening?), home protection, etc. Redundancy could be the making of you.
This is a good time to spend a couple hours organising your finances, from a careful assessment of one’s debt to proper calculation of income, can be invaluable.
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