When working with private clients I am privileged to be allowed an insight to their personal finances. I’m not talking about investment strategies or tax planning – that is the preserve of professional financial advisers – what I focus on are the basics – income, expenditure and assets.
I am regularly surprised by just how many people, including those with expensive professional advisors, don’t have a good handle on the basics. Asked what their income is, they tend to understate it while exaggerating their expenditure. Some know their assets, others don’t.
Why this matters was brought home to me recently. Chatting with a client while reviewing their assets it emerged that they were worried that the pension they had enjoyed for many years may stop. I assured them that, having worked for a former nationalised industry, that was unlikely and that if it happened there were various safe-guards in place, but the fear was genuine and it weighed heavily on their spending. Having identified the concern I pushed further – how much do you spend each year? ‘A lot’. Can you be more specific – ‘I have no idea’.
Without this insight it is impossible to plan. If you can’t answer the question ‘How much is enough?’ then you tend to hold on to everything ‘just in case’. This has a real impact on your quality of life.
Many clients are not lucky enough to be financially secure, but the same principle applies. Those who know their basics know how much they can spend and they enjoy it. One family knew an elderly relative was spending more than her income each year and that her modest savings would only bridge the gap for another five years. Knowing this they had time to plan, as a family, how they would lend her money when, and if, the time came.
It is only by ‘knowing the basics’ that you will know ‘How much is enough’.