Eight Financial Planning Mistakes People Make and How to Avoid Them

Whether you want to revamp your current financial plan or get started, it is the perfect time to look at your finances, set a few short and long-term goals, and prepare for the future.

1. Failing to make an overall financial plan

You might have a good understanding of your current situation, but do you know what sort of life you want in the future? What about your retirement, or your legacy? Is your family protected if something happens to you? How would you like to grow your wealth over time? These are all considerations addressed with a financial plan. Financial planning is about protecting and growing your wealth and ensuring you pass it on to the next generation in a tax efficient way.

2. Having nothing or not enough in an emergency fund

Many people enjoy living by the mantra that bad things will not happen to them. This way of thinking leaves many people in difficulty if their business is disrupted, unexpected expenses are incurred, or an illness means they are unable to work. A good rule to follow is to always have three to six months’ worth of living expenses available to you in cash deposits. There are also a range of insurance policies available such as income protection which may be suitable for some.

3. Not saving enough

Wherever possible, it is always worth considering putting some money aside for the future. Now, many are considering deposit accounts because of the increasingly attractive rates of interest paid. Those thinking longer term, whether for retirement or for other purposes, might be considering something like an ISA or investment account which, due to the compounding effect of returns, can generate a higher rate of return than simply saving.

4. Not considering your desired lifestyle in retirement

Many people think they can pick an age to retire based on when they want to stop working but give little thought to their financial needs when they retire. You need to be honest about your finances, what sort of lifestyle you want in retirement, and how much money you will need to do so. Once you have done that you can better plan to avoid shortfalls in the future.

5. Not discussing finances with loved ones

Everyone manages their finances differently and has different personal priorities and goals. Finances should be a regular discussion among couples as well as immediate family members. Ensuring partners and adult children know where family wealth is going and the responsibilities that must be taken care of is crucial. It is often adult children who end up dealing with things like later life care and settling of an estate if their parents’ wishes are not communicated. To that end, it is also important to write a will setting out what you want to happen with your estate for future generations. It is also worth considering lasting power of attorney which gives named individuals the legal right to take decisions on your behalf if you are unable to do so yourself.

6. Assuming the state will provide enough in retirement

As of 1 April 2024, the UK state pension (assuming you have the full entitlement) is £221.20 per week, where studies show that the average UK household spend is £675 per week. This reinforces the need to plan to ensure you can maintain your desired standard of living in retirement. While the government’s current ‘triple lock’ guarantee ensures a minimum increase each year in the state pension, the amount is not guaranteed in the future, nor is the age at which you will be entitled to start claiming the state pension.

7. I do not need protection, it will not happen to me

You might get lucky in life, however there are certain eventualities that are unavoidable, and insurance can be one of the most tax efficient ways to ensure your loved ones are taken care of if the worst happens.

8. My business is my pension

If the pandemic taught us anything, it is that unforeseen circumstances can have a devastating impact on businesses. If your business is your sole source of retirement income, and your business faces difficulty, your retirement plans can be seriously derailed. Diversification is important if you are trying to grow your wealth, so while your business continues to succeed, it is worth considering trying to derive additional streams of income from an investment portfolio.

This communication should be considered a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It is for information purposes only and does not constitute advice, a solicitation, recommendation or an offer to buy or sell any security or other investment or banking product or service. You should seek professional advice before making any investment decision. The value of investments, and the income from them can fall as well as rise, and may be affected by exchange rate fluctuations. Investors could get back less than they invest. Past performance is not a reliable indicator of future results.

The tax treatment of investments depends upon individual circumstances and may be subject to change.