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How many times have you told yourself you are going to try and save more but then somehow several months slip by without putting away a penny? You’ve paid for everything else – rent or mortgage, shopping, bills, clothes, holidays and maybe even a few meals or nights out but you haven’t paid your most valuable asset – you. And so it goes on and on. This happens to everyone, regardless of income level. If this sounds familiar, it could mean you should change your mindset and pay yourself first.

Pay yourself first

This is not the same as spending money on yourself! It’s saving some money before you do anything else. This is setting aside a certain portion of your income the day you get paid before you spend any ‘fun money’. I’m not being a kill joy here, quite the opposite. This is me trying to help you prolong joy! Many people wait and only save what’s left over—that’s paying yourself last. What this could ensure is that one day, you finish the rat race without the cheese.

Understand your current self

Take a look at yourself. I mean your life as a whole – what do you enjoy doing? What are your hopes, loves, hates, fears, habits, routine, family etc. This is your current self. Your current lifestyle is funded by your current self.

Now have a think about what you would like your future self to be. Do you imagine much will be the same? What would you want to be different? Many people imagine a more comfortable future, perhaps a continued or better lifestyle. Most certainly don’t want to give up any of the luxuries they may have become accustomed to. The problem is that we are sometimes very optimistic creatures that don’t think about the bridge between the current and the future. How are you going to pay for that future? ‘It’ll be alright’ is a path that surely won’t end well.

Pay your future self

So, one of your current self’s main responsibilities is to fund your future self. This can be achieved by the practice of paying yourself first, helping to make sure your future self’s key financial goals are covered, including building up an emergency fund, contributing to retirement and saving for any other long-term goals, like a bigger home. You should be your biggest bill. The bottom line is that it’s important to have all of these things covered before you spend your hard earned pounds on that flash car, slap up meal or top of the range phone.

According to a recent report by Legal & General, the average UK household only has enough savings to last 32 days, before hitting the breadline. Around 15% of people in the UK have no savings at all. Individual circumstances obviously make a difference, but one this is certain – we are living longer and the responsibility of funding our lifestyle, for life, is our own. According to Aegon in their 2018 retirement readiness report, 59% of people in the UK think that future retirees will be worse off. About 22% think that it will be around the same. The way that many people behave, I’d have to agree with the 59%!

Our unique opportunity

You’d think this would be enough to scare most people into saving better, except there’s the little matter of, well, just about everything else that payday has to cover. This is why we are all currently in a unique position to break the cycle. Coronavirus is unfortunately spreading at a faster rate once more, meaning more lockdowns and less opportunity to spend money on a day to day basis. Use this to your advantage!

The sooner you get started, the better off you may be. Not only will you be able to take advantage of compound growth (more on this later) to help grow your money faster, but you’ll also help ensure that your financial goals are getting funded before life happens. Don’t wait too long or the car might break down, the boiler might break, you might spend too much of your spare time on Amazon or the pubs might re-open until a reasonable hour!

Saving should be automatic

Switching to a ‘pay yourself first’ mentality can be hard because people don’t like change. We are a stubborn stuck in our ways bunch. It’s like challenging the status quo. That’s why rather than physically having to make the decision to do this every month it’s absolutely the best idea to make this automatic. Take the slice of your income that you have decided you want (need!) to pay your future self and pay this automatically into the right investment.

Set up a direct debit to your pension or ISA before you see that money hitting your current account. Paid on the 1st? Great set the direct debit to that day. Even better, if your savings are for retirement then your employer may be able to divert your pay directly to your pension. This may include extra matched contributions from them if you are lucky.

This is a marathon not a sprint

The hard bit here is that you are not going to get instant gratification. You should not over do it, as you will be more inclined to stop. You should not under do it, or your future self will be skint. With the right amount of automatic, forgotten about, steadily increasing savings you will be surprised how much you can pay your future self. long term saving is slow and boring! I promise you though, this is worth it to ensure you don’t have to be boring in the future too.

How much you choose to save will depend on your current budget and your desired lifestyle both now and in the future. If you don’t have a budget you damn well should have! I recommend, as soon as possible, going through the pain of getting your last three months statements and analysing them thoroughly. All you need is a pad, pen (or spreadsheet), a cuppa (substitute for beer/wine only after 4.30pm Friday) and an hour. That’s it. Your task in this time? To know exactly what your spending looks like. What is fixed or flexible, essential and non essential. Simple as that. Just this task alone will highlight the stark reality of your current self. You may feel satisfaction. You may feel shame.

Either way, if you think you are not saving enough, finding the costs you can reduce or eliminate is key. Because you are either saving or spending money. There is no inbetween. The grey area that your mind thinks exists between the two is non existent – like the exercise you do with the gym membership you haven’t used in a while. What you save by trimming the cost of stuff such as this is all money that can be used to pay yourself first.

What could making this choice do for me?

A lot. The table below shows the amount you would be paying your future self after saving a monthly amount for 10 years. There are three rates of return. Why? Because if you are saving for a few years you should definitely be considering your options for bettering bank rates. This is ample time to ride out the ups and downs from stock market returns. You should take the opportunity to grab your fair share of profit made by the companies you support through your spending every day. This doesn’t have to involve lots of risk and if this is something you don’t understand you can take some advice – I promise this will be worth it. Find out what you could save each month and take a look below at what you could potentially achieve. This might be a surprise for you!

10 year saving example

£’s Saved per month3% Return5% Return7% Return
Capital accumulated after saving monthly for 10 years with three rates of return

What if I’m self employed?

Anyone who owns their own business knows the ups and downs of good and bad months, I know this from personal experience. It’s harder to save a specific amount when you don’t know how much you’ll make from month to month.

So how do you deal with this?

Dead easy. Your budget should be based on an average month. Businesses should be thought of as seperate to personal finances. Your business may be cyclical, but as with any financial planning exercise this is about taking away uncertainty. Putting some money aside in the good months, will ensure that there is always capital to pull so that you can pay yourself first.

Of course, this only works if business owners are paying themselves a salary to begin with. Many small business owners tend not to pay themselves at all—let alone first. Often they leave as much in the business account as they can, reducing their salaries to nothing. This can sometimes be counter productive. You have yourself to look after as well as your business.

In summary

The ultimate guiding principle behind paying yourself first putting your own long-term well-being ahead of almost every other financial situation – because you are your own biggest asset. All this being said though, it’s just another way to look at the process of getting together a long term financial plan. At the end of the day, financial planning is all about the current and the future.

If all this sounds good it’s time to take action. If you’d like some help to formulate the plan, give me a shout – I’ll be happy to help build your wealth and future happiness.

Don’t make your future self hate your current self. Just pay yourself first.

Until next time!

Chris @ Agile

Hello out there. It’s nearly the weekend again. I hope you’re all still well and safe, spirits up and eager to learn of your next investment opportunity. This week, I’m going to take a look at tax and more importantly saving it. It’s been topical recently after a very well known figure across the pond and what seem like a great team of advisers he has! Firstly though I must make one thing clear – I am no magician and I’m not prepared to be ‘creative’ with the truth. That would be illegal! So, if you are a billionaire expecting me to cancel your tax bill this year, you will be sorely disappointed.

For most people out there however, spanning from those with a modest nest egg to those with millions, there is hope. Plenty of ways exist in which you can very legally keep your hard earned cash away from the dreaded tax man. This isn’t dodgy. This is just about making use of the allowances available to each and every one of us.

This list certainly isn’t exhaustive and should not be taken as individual advice, but here are a few of the main ways that you could get a little bit closer to paying tax like Trump…

1. Use your ISA allowance

OK, cash ISA’s offer very little return at the moment. I know. In fact, in some cases if all you can do is cash, you may be better off without the ISA – but only if you have relatively modest savings and don’t invest outside of cash at all.  Otherwise, you should consider making use of your full allowance if you can do so. Why? Two reasons.

Firstly, because it’s a use it or lose it situation. You may not think the ISA is worth it now, but the returns will always be tax free (subject to no rule changes). That’s a very valuable benefit for those that have managed to, or are likely to, build more substantial sums.

Secondly, ISA’s can make use of many more investments than just cash. Most offer you a much better potential for return if you are prepared to accept even a cautious amount of risk and invest for a little bit longer. This can substantially increase tax free income.

2. Use your pension allowances and tax reliefs

By using a pension to save for retirement, you’ll also avoid paying some tax. That’s because your pension contributions qualify for tax relief. So if you’re a basic rate taxpayer, you’ll qualify for tax relief at a rate of 20%. Meanwhile, higher rate taxpayers qualify for tax relief at a rate of 40%.

Do you own your own private company? Great news, pension contributions in most cases will count as a business expense, therefore a saving of 19% corporation tax can be made.

You should note that the amount you can contribute to your pension is now limited to £40,000 a year, but your allowance for a limited number of previous years can be carried forward, so where funds exist this can be a substantial win. But this again could be classed as a use it or lose it situation.

Pensions grow tax free too, so they are are a great way to build up a tax-free nest egg for your retirement. That said, once you start to claim your pension income, you will have to pay income tax. Don’t worry! You do get the first 25% of your pot to withdraw tax free and you can structure your income appropriately – more later.

3. Use your personal income tax allowance.

Every one of us currently has a personal tax allowance, a nil rate tax band if you like, of £12,500. If you are part of a couple (that is in a good place I should add!) this presents you with a couple of opportunities to use it!

Firstly, just taking the pension issue a little further, it may be useful to structure some of your contributions to reflect that this allowance can be used by you both when you start to draw retirement income, but only if you’ve got sufficient funds to draw. This could be a useful tool for example if you are both directors of a family company or have excess income.

Secondly, if you are married or if tax and personal circumstances allow, you could transfer any income producing assets to his/her name and receive a nil or lower tax rate by using his/her personal allowance.

This means that for a couple, with the right investments and structuring of contributions to pensions, in retirement you could bag yourself an income of £25,000 before you start paying any tax and this could be drastically increase by also having a properly structured investment portfolio.

You can find info about personal tax allowances here.

4. Use your other allowances – all of which most people have!

Savings Allowance

Since April 2016, savers have been able to grow their money tax free, thanks to the ‘personal savings allowance’. This allows you to earn interest up to £1,000 interest tax-free if you’re a basic-rate (20%) taxpayer, or £500 if you’re a higher-rate (40%) taxpayer. Additional-rate taxpayers don’t receive a personal savings allowance, so if you earn more than £150,000 each year, you’ll need to pay tax on all your savings.

All interest from savings is now paid gross, which means tax will no longer be deducted by your bank or building society. At today’s rates you could have a fair amount invested in cash before you start paying tax on the returns. I would of course suggest that this is a terrible idea given inflation would eat away at your capital quite readily. All is not lost however, as some investment funds offering higher potential returns (with some risk) are also ‘interest’ producing. This means you can structure your investment portfolio accordingly to make use of this allowance.

Dividend Allowance

Everyone has a tax free dividend allowance of £2000 per year. This means that for owners of private limited companies taking company profits as dividend, or investors in public shares receiving dividends this is a valuable allowance.

Taking regular dividends over time from an income producing share portfolio or share based fund portfolio can add a healthy amount onto your retirement income. These could be phased into ISA’s over time, further reducing tax and giving you a slice of the profit from the great companies of the world. For the well informed investor this strategy is a must.

Capital Gains Tax Allowance

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount). The Capital Gains tax-free allowance is £12,300. This gives you the opportunity to purchase investments with readily available capital at any time and then phase them, as detailed above, into more tax efficient environments such as ISA’s.

This also gives you the ability to realise amounts of capital for one off expenditure, such as those kitchens, cars and cruises!

So what now?

OK so that’s it. Nothing hard there at all?! But even with some of the more experienced savers and investors out there, in most client meetings I can usually manage to save some tax. It’s all about structure and it’s all better off in your pocket than with the tax man.

If however what you’ve just read means nothing to you, but you have pensions and other assets that you’ve worked hard to build over time, you could probably use some advice. Structuring your future wealth and income properly could quite literally save you thousands and I always find it is well worth it.

I appreciate some of you may like to see this in practice, so at the end of this post I’ve added a case study example. It’s an easy one I know and I fully appreciate that everyone is different and the world is not ideal. So why not drop me a line? I am always on hand to answer any questions you may have – just email or use our contact form and we will gladly contact you.

Thanks for reading . Until next week.

Chris @ Agile

Case Study David & Rachel, both 66. Target after tax income – £30,000.

David and Rachael are ready to retire, they have just celebrated their 66th birthdays. They each have money purchase pension pots, David has a sum £200,000 whilst Rachael has £150,000. Their children left home a while ago and since then they have done a great job at saving. They also inherited a small amount from parents. Having managed to fund ISA’s to some extent for a number of years they recently decided these should be invested rather than held in cash given terrible cash rates. They are currently worth £75K each. They like to keep a cash buffer too, so have £50,000 in a savings account paying 1%.

Knowing that their spending habits will change now that they are no longer working, Rachel set out to create a budget that would fit their lifestyle in retirement. They no longer have a mortgage so it’s really as simple as day to day spending, the occasional holiday and social. This comfortably comes within £2500 per month.

The zero tax solution…

State Pension£9,110£9,110£0Within Tax Free allowance
Pension Drawdown Income£4,520£4,520£0Uses remainder of personal allowance as taxable income and includes the tax free cash available on the payment.
ISA 3% Withdrawal£2,250£2,250£0Income and capital gains both tax free
Savings Interest£250£250£0Within personal savings allowance.
Total Income & Tax£32,260 £0

This allows them to live comfortably to their lifestyle and have money left in pensions and investments for the ‘big things’. Of course, if you are younger than state pension age great – just replace it with private pension withdrawals. They’ve even got a little Brucie Bonus on top of their desired 30K. Happy days!