Using a financial planner isn’t for everyone. Lots of people have an interest in personal finance and are willing to spend the time learning about it and keeping track of things (although over confidence in their own abilities can be an issue). But there are lots of people who have no interest in personal finance and these are the people who benefit significantly from working with a financial planner.
Take the example of self employed business partners Angela and Peter. I have been working with Angela for a long time. Peter does not have a financial planner.
A business opportunity came up for these partners recently that they want to buy into. Part of our work with Angela is to make sure she has a cashflow fund to pay for unexpected expenses and opportunities. She is able to use this money to pay for her share of the cost of this opportunity. Peter doesn’t have a similar fund so he has to borrow his share. This has lead to delays in closing the deal and is ultimately costing them money.
Both Angela and Peter are self employed and have substantial tax bills each year as well as their preliminary tax. A number of years ago, working with Angela’s accountant, we moved her from paying a large lump sum each year to paying her tax on a monthly basis. Her accountant estimates her future tax each year and she adjusts her monthly direct debit so she does not get a large tax bill each November. Peter pays his tax in a lump sum each November but often needs to borrow this money and has to pay it off over the next 10 months.
Angela knows where she is going regarding retirement. She has a defined investment strategy and she contributes to her pension consistently. While markets are down at present, that doesn’t phase Angela who knows that if she sticks with the plan it will get her to where she wants get to.
Peter has no idea when he will be able to retire or how much he can expect to have. He often can’t afford to make pension contributions because he has spent the money on other things. His pensions are all over the place with a selection of investment funds that scream “flavour of the month”. There is certainly no investment strategy there with some of his funds performing very badly over a prolonged period of time.
Despite earning the same amount, the cost of Peter’s lifestyle is significantly higher than Angela’s. Where Angela saves money into her cashflow account, pensions and investments, Peter spends what he earns. When it comes to retirement, he will have less money saved to fund that more expensive lifestyle. Meanwhile, Angela will have a bigger pot of money to fund a cheaper lifestyle.
As you can see, Angela has a lot of structure around her finances and can plan for the future with confidence. Meanwhile, Peter is just going to wing it and hope it works out in the end.
So why isn’t Peter talking to me? The suggestion has been made but while you can lead a horse to water, you can’t make him drink. Working with a financial planner means Peter having to work on his finances and he knows if he doesn’t get organised, he will be told he either won’t can’t afford to retire or else he’ll run out of money very quickly. People don’t like hearing this and would prefer to stick their head in the sand rather than make the hard decisions.
I don’t know what percentage on returns this equates to but wouldn’t you prefer to be sure about your finances and where you are going rather than having no idea what the future looked like?
Steven Barrett
12 December 2022