These days we’re all encouraged to take more care over our health by eating sensibly, taking exercise etc. But how many of us take equal care over our financial health?
Our financial profile consists of our income, outgoings, assets and debts. For many this profile is either something that’s just happened piecemeal, or it was planned at one time but has not been reviewed since.
Everyone should have a financial health check at least once a year. The holiday season might be a good time if you find yourself at a loose end. However, be careful not to review your finances too often, lest it lead to “churning” (moving investments unnecessarily) and the associated fees.
DIY vs. Advisor
You can either conduct your financial health check yourself, or you can hire a financial advisor to do it for you. The best bet is to spare the time and effort to do it yourself. After all it is your hard-earned money, and no one else is going to care for it as you do.
If you do decide to use an advisor, make sure you choose one you can trust. Personal recommendation is a good guide. Allow the advisor to advise, but make sure that you make the final decision. If you use a commission-based advisor be particularly careful that their advice is in your best interests rather than theirs. A golden rule is that if you don’t understand it, don’t do it!
Know your goals
Reconsider your financial priorities. Why are you saving/investing and have those reasons changed since you constructed or last reviewed your portfolio. In general, the closer you get to an objective the more conservative (risk-averse) you ought to become.
Spending
Look over your bank statements. You should already be taking the time each month to reconcile these with check stubs, ATM receipts etc. Are there any direct payments that are no longer needed? eg insurances that are no longer appropriate, memberships or subscriptions you no longer require…
Do your bank statements highlight any changes you could make to spending habits, eg do you buy stuff daily in the convenience store that you could get cheaper at the supermarket?
Investments
Do you have any investments? Stocks, mutual funds, real estate? If so, ask yourself 2 questions – are they performing to your expectations? and are they still the most appropriate place for your money?
In deciding whether to move your money you need to consider the most likely future performance of potential choices, the costs of any move (exit charges for currents plus entry charges for the new), whether the alternative(s) better fit your objectives.
Are you comfortable with the risk level of your portfolio? In general, the longer the term the greater the risk you can stand. But risk is also a personal thing. If you’re losing sleep over your portfolio, it’s time to decrease risk. Alternatively if you want more of a gamble, then go for it.
Remember, on average managed funds don’t beat the market, and those that do probably do so by chance. Tracker funds offer lower fees and (on average) better performance. Is now the time to switch to tracker funds? And if so, which index(es) do you want to track?
Mortgage
For many people their mortgage represents a significant portion of their outgoings. If you have a mortgage are you getting the best deal? There is no shortage of competition among those wanting to lend you money. It may be worth consulting an independent advisor, or using one of the online comparison sites.
Be sure to read the small print before switching. You need to consider not only your monthly payments, but also any up-front costs, and exit costs (both on your current and proposed mortgage)
Insurance
We probably all need insurance of some form or other, on our home, our car, our health, our life… And it’s worth checking periodically both that you have the cover you need, and that you’re getting the best deal for it.
Taxation
For most of us taxes are a necessary evil. But we can all make sure we’re not paying a cent more than we need to.
Make sure you’re claiming all the allowances you’re entitled to. If you work wholly or partly from home, maybe the heating, lighting, power, phone etc used in respect of your work are tax deductible. Or if you need to travel can you claim for fuel or fares?
Take advantage of any tax breaks on savings and investment offered by your government. But only if those savings or investments are appropriate for your particular needs.
Couples should take advantage of the individual tax position of each partner. EG if the wife doesn’t pay tax then the couple’s savings should be held in her name to avoid it being taxed.
Each partner is usually entitled to their own set of tax breaks.
Not a nice thought, but some planning ahead can also minimize or eliminate inheritance tax.
The tax system is complex, perhaps it is designed so in order to confuse. The key point is to understand the system and the rights you have. This may mean a visit to the library or an afternoon reading the rules and regulations online. It might be worth paying a visit to a reputable accountant or tax advisor.
Pension Provision
It’s never too early to start saving for a pension. Are you on track to have sufficient income after retirement?
Employer’s schemes are usually a good deal as the employer often makes a considerable contribution. “Final salary” schemes are particularly worthwhile, but these days are becoming rarer than hen’s teeth, in England anyway.
Alternatively you have the option of joining a designated pension scheme or building up your own investments to see you through old age. Recognized schemes often provide significant tax advantages, but may carry substantial fees and involve entrusting your money to a fund manager. Pension laws vary from country to country, but perhaps you have the option to take out a self-managed pension plan with tax benefits but without the fees of a managed fund.
You may just decide to go it alone, but whatever you do, do not neglect your pension.
Keep watching the diet and taking daily exercise and you’ll live a long life. Remember to keep a check on your financial health too and you’ll have the money to enjoy it!
