Five financial targets everyone should have
1. Pay off your debts
If you have any outstanding debts paying this off should be one of your main goals. While saving is great, any interest rate you earn will be less than the interest you will have to pay on any loans you've got so the golden rule is to pay off debt before saving.
2. Sort out a rainy day pot
While it is tempting to spend all the money you've got on specific goals such as going on holiday or sprucing up your home, it's important to build up a savings buffer to cover for any unexpected events.
As a minimum, this should be equivalent of three months' salary but ideally it should tide you over for at least six months.
3. Start a pension to ensure you can retire
Even though this might be far away for some of you, when it comes to saving for your retirement the earlier you start the better. If possible you should start as soon as you start work as long as you haven't got debts to pay off. The longer you leave it the more you will have to pay in each month to be able to enjoy your retirement.
4. Get onto the property ladder
While we've seen the property market drop over the last couple of years, buying a property is still an investment so long as you consider it a long-term one, and you get to live in it too.
5. Protect your finances
While buying insurance is not the most exciting financial goal to have, it could be one of the most important decisions you ever make.
If you have dependants make sure you've got life insurance, should something happen to you and if you are relying on your income to make ends meet it could be worth taking out income protection insurance that will cover you in the event of getting ill or injured and unable to work.
Five reasons we fail in our financial targets
1. Ideas of grandure
The more grandiose your goal, the less likely you are to achieve it. At the end of the day, we're unlikely all to become millionaires by the age of 30. But we might be able to pay off our mortgage by the age of 45.
2. Realistic goals
Our goals don't reflect the "real" us. Sometimes you don't need much money to achieve a particular goal. For example, one adviser found that his clients' long-desired goal was to attend the Chelsea Flower Show, which only cost a train ticket, a night in a London hotel and a few pounds for admission.
3. Lack of planning
We don't plan thoroughly enough. It is possible that you will never face redundancy. But experience suggests it makes sense to factor potential job loss into your goals, as they determine how much you may want to spend of your income right now and how much more you set aside for a rainy day.
4. Reviewing goals
We fail to review our goals regularly. Circumstances change, what was important five years ago may not be today. Stockmarkets can fall sharply, or mortgage rates may have gone up, or an annuity – the annual income paid from a pension lump sum – may be worth less now than it was.
5. Not taking advice
We don't take expert advice. Good independent financial advisers can be worth their weight in gold. They can find the cheapest mortgage, the best pension, the most appropriate insurance policy and help choose the best investments – all allowing you to meet your goals more quickly and more easily.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Income protection insurance
If you can’t work in the event of sickness or illness, income protection insurance aims to give you an income, with the amount of income set by you up to 75% of your gross (before tax) income with the premiums varying by how much of your salary you want to cover, as well as your age and health and when you want to start receive any payouts. Any payouts from income protection insurance are tax-free and usually continue until you recover, reach your selected pension age or the period of cover specified in the policy comes to an end. Income protection insurance does not cover redundancy but you can buy it as a bolt-on.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.