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The key to managing your money effectively is to automate as much of the management as possible. Too many people live their working life with ‘too much month at the end of their money’, when a simple management system would have lead them to a more prosperous future. As a result, it is important to divert your money into different areas as and when you get paid.
Let’s look at how this would work in pre-retirement first. The money that you earn each month should be divided into a number of different accounts to allow you to manage your money much more effectively. Most banks will allow you to automate this, and some of it can be covered by Direct Debits, to ensure the transfer actually happens. An example of how this might look would be as follows:
|Total Monthly Net Income £5,000|
|Your Money Split||%||Monthly||Vehicle|
|Financial Freedom Fund (FFF)||13%||£ 667||Pension|
|Long-Term Growth Fund (LTGF)||10%||£ 500||ISA/Funds|
|Savings for Specifics (SFS)||10%||£ 500||Bank Savings/ISA|
|Play Account||05%||£ 250||Separate Current Account|
|Give Account||05%||£ 50||Efficient Charitable Trust|
|Necessities Account||57%||£ 2,833||Current Account|
|Financial Freedom Amount||£ 1,040,000|
As a reminder of what each of these accounts are:
Financial Freedom Fund (FFF): This will be the fund that allows you to stop work, by generating you a passive income in the future.
Long-Term Growth Fund (LTGF): This will assist your FFF in retirement but provide you with flexibility in case you need extra capital, for example, to set up your own business.
Savings for Specifics (SFS): Setting up one or a number of separate accounts (e.g., ‘Car’, ‘Holidays’, ‘House’) and savings set amounts into these each month ensures you save to spend rather than using credit.
Play Account: It is important that you enjoy the dividends of your hard work. You must spend the money in your play account monthly, or at least quarterly, so that you enjoy the life you lead.
Give Account: In addition to providing for those less fortunate, giving money to good causes also changes your own psychology and attitude towards money. Furthermore, if the benefits of ‘Tithing’ are to be believed, you too will reap the rewards by doing so.
Necessities and Insurance Account: This pays for your usual bills like the mortgage, utilities, food, etc.
Whilst you can alter these percentages given the pensions rule of thumb, it makes good financial sense not to have any less than 20% going into the combination of the Financial Freedom Fund and the Long-Term Growth Fund. If you aren’t saving anything at the moment, it might be difficult to leap straight into this percentage from a standing start. Don’t worry; there is a way to fix this too. When we put in company pension schemes we give them the option to introduce what we call The Future Pension Promise.
It’s all about the psychology of saving. If you can’t save as much as you know you should, decide on a percentage of all future pay rises that you will save, and make sure you do it each time before you get used to that extra money. You won’t notice a thing, and yet you will get your Financial Freedom back on track.
Many people won’t start saving because they aren’t sure where to save. Their procrastination stops them from saving anything at all. Ultimately, saving somewhere is always better than saving nowhere. If you picked the worst pension on the whole market today, it would still be better than nothing. I’m going to show you how to ensure you aren’t in the worst pension, but the important thing is to get started if you aren’t already. Only your actions can change this, so you need to jump into action to change this.
By saving and managing your money, you will have much greater clarity on where your money is going, and almost certainly you will save more. So make some decisions now, and then take action!
The Richest Man In Retirement
Now that you are financially free, there is no need to save further towards that. In fact, better to leave whatever you can afford to in this account, so that it can continue to grow. The same applies to your Long-Term Growth Fund, as this will probably also supplement your income.
Whether you have accounts to save for specifics will depend on how your retirement funds are structured. If you have access to all of your pension funds because you are using drawdown to provide an income, you won’t need those accounts. How you spend that money will be more dependent on your Cash Flow Forecast. Any money you don’t need for income today should be left to work as hard for you as possible in a good investment strategy. In this instance, it is more important to keep track of your Financial Freedom to ensure you are not going to run out. The Lifetime Cash Flow Forecast is the best tool for doing so.
If, however, your income in retirement is derived from annuities and company pension incomes, then you will need to be more sensible with your ‘savings for specifics’.
You will need to put a little more thought into how much will need to go into each account here than someone in pre-retirement. The key is you are forcing yourself to budget on a monthly basis, which will give you much more clarity on where your money is going.
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Managing Your Money Effectively Pt.1