Do you know what your financial needs are? For most, that’s going to be paying the bills every month, saving for a pension, and putting money into a rainy-day fund. But there’s more to it than that.
For instance, do you know what the financial skeletons in your closet are? Have you looked at your spending and goals and been completely honest with yourself? Has your partner been honest with you? Have you been honest with each other?
Most people are better at hiding from financial realities than facing them. The good news is that you can get your head out of the sand by answering five simple questions and the result is a personalised and far more beneficial financial grounding.
But before you do this, first read my five top tips on how to review your financial position so you know what your starting point is and how much assets you own.
1. Am I on top of my spending?
Do you know what you spend your money on? When I meet with clients, budgeting is almost always a blind spot. Most can’t quantify what they spend their money on and do not have the appetite to do so.
The general rule of thumb is that people spend what they earn. Unfortunately, this approach means that as you earn more you spend more - instead of buying your shoes from Primark, you graduate to Dune and so it continues.
Working out how you spend is a valuable exercise. In the vein of practising what I preach, my husband and I spent a year recording all of our transactions into an Excel spreadsheet. I was horrified to see the proportion of our net income that we had spent eating out (quite often on lacklustre meals). On reflection, we did not feel it offered great value and decided to take a different approach.
Now it is easy to download an app and track what you are doing. If you are not saving, if you don’t have a rainy-day fund, then you may find this exercise will give you the opportunity to reflect on your habits and decide if they are actually serving you.
2. What can I do to improve my income?
On a different tact, if you invested in yourself, would it allow you to build your career collateral? Would this allow you to increase your income? This may be a more effective route for you than reducing your costs.
If you have existing assets is there anything you can do to improve the position from a tax point of view. Have you looked at it recently in light of income tax changes in the last couple of years?
3. What do I want to do?
Money is a means to an end, so what do you want it to do for you? Is it retiring early? Paying for your children’s education, working your way through a bucket list?
Understanding what matters allows you to begin with the end in mind. I find a lot of clients haven’t necessarily considered this before and doing so offers them clarity.
The amount, the structuring, the risk you are willing to take for the returns that you need from your investments should all relate back to your needs.
4. Would I be able to survive on less money?
The context here is twofold. Firstly, have you thought about risk? Not an appealing prospect I know but what if you lost your job, become ill or died? Have you thought through the consequences?
Secondly, are you saving enough for the longer term? Would you be happy with a drop in income later in life? If you need to bridge the gap and save more, think of it as paying yourself before you pay Apple, Amazon and John Lewis, for example.
5. Why is money important to me?
Getting a little bit deeper and really peeling back the layers when answering this question will help you get in touch with your feelings, beliefs and values around money.
These will be unique to you and well worth exploring as they will help you to determine your financial goals.
Anne McClean is a senior chartered and certified financial planner at advisory firm Charles Stanley. She has been awarded a Fellowship of the Personal Finance Society and is an associate member of family law organisation Resolution and a member of STEP, the professional association for practitioners who specialise in family inheritance and succession planning.