personal finance

Would your finances pass the 10 year challenge? 


2020 has spawned the “10 year challenge” on social media, where people give their friends a laugh by posting a 10-year-old snap of their younger (often thinner) selves next to one from today. 

Ten years can make a noticeable difference to your waistline, hairline and laughter lines — but how about your financial bottom line? 

I am fatter than I was 10 years ago (the diet has already started) but at least my finances are in much better shape. Chances are, yours are too.

Those of us who started the last decade with assets — think property, pensions, and share portfolios — have seen their value boosted by financial stimulus pumped out by central banks around the world. Global equity markets have smashed record after record, creating the first trillion dollar companies.

British retirement savers have much greater control over their financial future thanks to pensions freedoms, ushered in half a decade ago, and the newly enlarged annual Isa allowance of £20,000. 

But on the flip side, a decade of low interest rates has been terrible for cash savers and it’s harder than ever to get on the property ladder.

So if you’re inspired to do a financial workout this weekend, where should you start? 

I only check my stocks and shares Isa a few times per year as I don’t want to get into the habit of over trading. The past decade has been brilliant for people like me who mostly invest in low-cost tracker funds. But mentally, I am preparing for the downward shift which must inevitably come.

I am not planning to touch the money inside my Isa until my sixties or beyond. My focus for this year (as a journalist and an investor) is how to develop a more active strategy moving forwards. This may or may not involve picking actively managed funds — I tend to prefer investment trusts — but I recognise that adopting a more value-seeking approach is going to mean devoting more of my time to managing my investments.

Another (as yet unanswered) question for the year and decade ahead is how green my investments need to be. I don’t like the ESG label (environmental, social, governance) but the impact of climate change is something that every investor needs to consider.

My 24-year-old stepson is spurring me on, as he wants to reposition his own investments for the greater good (“What do you think of this ESG fund Claer — is it just greenwash?”)

My system of setting and tracking my spending priorities and savings goals has not changed much in the past decade; what has changed is the financial technology at our disposal.

I was banking online 10 years ago, via a laptop, but now I can manage multiple accounts and even pay in cheques from my smartphone. 

The rise of app-based digital challenger banks is keeping the legacy banks on their toes — it’s never been easier to monitor your spending with free budget planning tools and alerts. 

And look at contactless payments. My bank statements are several pages longer than they were a decade ago as so many more transactions are recorded — but this makes it easier to monitor my spending. 

A few clicks on the app for my main current account can reveal the cumulative effects of good or bad habits over the year. How much did I save into my Isa? And how much did I spend on Uber? 

I find that looking at the annual total gives you the incentive to cut down (or set a limit) on the monthly total. And after the excesses of Christmas, January feels like a good time to reset the budget and search for savings.

Start with your mortgage lender. If you have a good level of equity in your home, switching to a lower-rate deal could potentially save you hundreds of pounds per month. Roll those savings into overpaying your new mortgage and you could knock years off the debt without even noticing the difference.

Every January, I rough out a budget for the year estimating what we will need to spend (and when) on tax bills, holidays, planned home improvements and topping up the emergency fund (sadly, we’ve already had the plumber out in 2020).

This gives me a better idea of what to keep in cash savings, and what to place in longer-term investments (the direct debits are deliberately timed to coincide with payday). 

I save my tax money into a Premium Bonds account to keep it ringfenced, and live in hope of winning a prize. Yet estimating what you might owe HMRC was complicated by the introduction of the pensions taper in 2015 (not the most auspicious moment of the past decade). 

If the taper has taken a bite out of your pension savings, don’t forget your spouse’s pension allowance, and the fact that you have a combined Isa allowance of £40,000 between you.

After completing a financial stocktake, I definitely feel more prepared for the year ahead. But I also like to think it’s helping me to prepare for decades to come. 

I’m still in the accumulation phase, but the prospect of leaner investment returns in future are more worrying for those already drawing an income from their retirement funds.

Post freedoms, there has been a huge rise in the use of drawdown plans where your pension savings remain invested in the stock market. The idea is to manage the level of withdrawals so that investment returns provide most of the income, slowing the rate at which your capital is eroded. 

How drawdown investors react to the next downturn will be a big test of their risk appetite. They will not want to make the mistake of cashing out at the bottom, so having a good grasp of your living expenses — and how these can be adjusted — is a crucial habit for tomorrow’s retirees to get into.

When I think of the 10 year challenge, I don’t dwell on how I looked at 32 (sigh) or 42 (groan) but what kind of shape I’ll be in at 52 or even 62.

Our financial plans for retirement will have to be more flexible — we will need to keep adjusting the withdrawal rate, tweaking the budget and carry on working for longer.

This brings new meaning to the phrase ‘fit for the future’. So that gym membership will definitely not be cancelled in 2020. I’ll just try to go considerably more often than I managed last year. 

Claer Barrett is the editor of FT Money, and a financial commentator on Eddie Mair’s LBC drive-time show, on weekdays between 4-6pm: claer.barrett@ft.com; Twitter @Claerb; Instagram @Claerb





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