Personal Financial Planning is becoming increasingly important to us all. As expatriates, we need to be savvier than most with our finances. We have more to think about when planning our finances than those whom we left behind in our home countries. This article discusses the important global social and demographic changes which make personal financial planning essential for us all. It also provides a useful process for planning your own finances and a few final tips on when and how to engage a professional.
The advances in medicine over the last 100 years have been amazing. A study published in 2011 by the UK’s Department of Works and Pensions revealed a baby boy born in 1920 had a 0.6% (1 in 167) chance of living to 100. A boy born in 2010 had a 25.7% (1 in 3.89). For girls, the change has been even more spectacular. The girl born in 1920 has the same chance as her male sibling but in 2010 she had a 33.3% (1 in 3) chance of living to 100. Most of us do not expect to work until we drop. We accumulate assets during our working lives and then use these assets to generate an income or a pension when we retire. To find out how long your pension will need to last with click here to open a UK Government Interactive Tool.
What does this mean for you? In short, we are living much longer. We have literally decades more time on earth than earlier generations. We are also more active and healthier. Whilst this is great news, there is one important factor we must not over-look. Is there a chance we will outlive our savings?
Most of us still think of working for about 40 years (or less if possible) and then retiring. This is the same model our parents and grandparents had. However, we will spend much longer in retirement. Therefore, to avoid running out of money we need to save more for our retirement or suffer a significantly lower standard of living in later life.
Another problem is declining birth rates in developed economies. State benefits are not paid from a big fund. They are paid directly from taxes and borrowed money. Therefore, as the population gets older a larger proportion of people will be in receipt of State pension and other benefits than are paying into the system. Borrowing in this situation will only be a short-term solution as lenders will always want to make sure the borrower can repay the debt. Therefore, either taxes will rise, State benefits will fall or a combination of the two.
Many governments around the world have recognised the potential problems faced by future generations in funding even basic state benefits. About 40 years ago, governments began a series of initiatives designed to encourage individuals to take charge of their own personal financial planning.
They provided a legal framework to for businesses to develop products and services. These services empowered people to make their own decisions about their financial future. However, there was a key ingredient missing from the equation… governments failed to educate their people. This lack of basic personal financial education persists in most countries to this day. Luckily, there are plenty of websites, blogs, books, and other media you can use to help you manage your own finances.
Try setting goals for different areas of your life: self-improvement, family, work, and social life. These are not just goals about money. You may want to devote time to learning a new language or a musical instrument. They improve the quality of your life but reduce the amount of time you will have for earning money, so a balance needs to be struck.
When setting your goals in each sector, think about what you have achieved in the past where you are currently and where you want to be. For example, your self-improvement and work goals may be closely linked. You might see a lack of qualifications as preventing you from climbing the next step on the career ladder, so working on additional qualifications may be a goal under self-improvement. Or you may want to quit the corporate world and start your own business.
Whatever you decided you must plan with a purpose. Remember, personal financial planning is a long process – ideally life-long. If you have every tried to give up smoking, diet or join a gym you will know that having an end goal helps massively with motivation. It is the thing you can go back to when you feel your will-power waning. The clearer your objective the better. Without a purpose, motivation will be low, and you are less likely to achieve your long-term goal.
For couples, I would recommend against doing this planning process together, at least initially. Thoughts should be written down for each quadrant. This will then enable you to see what your partner wants to achieve. You then work together towards the shared goals and time can be made for the personal goals separately.
Often there is a conflict between the immediate gratification felt when buying a new gadget or taking an extra holiday against setting aside some money for your future. We are easily distracted by all the ‘noise’ happening around us to be thrown off the path towards our intended destination.
Calculating you need $1 million dollars to retire and live the lifestyle you want when you have nothing will not be motivational. Many will see it as an unassailable barrier. So as the saying goes… “How do you eat an elephant?” answer: one mouthful at a time.
Taking our example of the investor wanting to retire with a $1 million. He has not saved before and so needs to make it a habit. Habits are most easily formed when we have a reward. We then associate the action of the habit with a good feeling.
Break down your goal into manageable chunks. Set milestones along the way. Decide on a reward for each milestone. You will know what is best for you. When you reach each milestone celebrate with the reward. Early on, you may want to make the milestones close together as you are developing your habit. Later you may decide to lengthen the gap between them or possibly do away with the reward. Often clients mention getting a ‘buzz’ out of watching their savings grow. Knowing they represent financial security.
When planning your finances, you should consider the obstacles that could prevent you from achieving your aims. Brainstorm as many potential problems as possible. Write them down and consider how they would impact each of your goals. Then think of how you would deal with these problems. Having this written down is important. One of the key lessons from crisis management is people have better outcomes when they have plan for a scenario. Some of the problems may have financial solutions and you should explore these options.
Now know what you are working towards. You know the potential problems you will encounter along your journey. There is a strategy for dealing with problems. You have a motivational vision to refer to when your willpower is flagging.
A good financial planner will be able to guide you through this process and gain a deeper understanding of your motivation behind your goals. Where a professional has been used, they will also be able to keep these goals alive and help you stay on track.
Another area where a professional can help you is in the form of running ‘what if…’ scenarios and helping you understand your lifetime cashflow.
Of course, the main area in which a professional financial planner can help is in recommending financial services which are suited to your needs and objectives.
Financial planning has never been more important due to social and demographic change. We are all expected to manage our own personal finances. The financial services sector is a vast and constantly changing field. This provides consumers with a lot of choice. Choice can result in procrastination which can have devastating effects on our future over time.
Planning is not about money. It is about what you want to do with your life. Money just a facilitator for some of your plans. Focusing on your goals you will achieve more than you thought possible. We looked at splitting goals into the quadrants of self-improvement, family, work and social.
Staying on track with your goals requires willpower. We have covered a few techniques to help. They were writing your goals down. Breaking the goal into smaller pieces and rewarding yourself at milestones when they are achieved.
For those who do not have the time, resources, or inclination to manage their own finances, professional financial planners can help.
When choosing a finance professional to help you make sure you do your homework. Check the regulatory and license status of their firm. Ask about their fiduciary status. Ask for details of qualifications, charges, membership of professional bodies and their experience of working with expatriates.
If you would like to discuss any of the points raised, please contact me on 00 971 50 594 5217 or via e-mail firstname.lastname@example.org Alternatively, if you would like a free initial planning consultation please book it here.