S2E10: Forget new year's resolutions, this is how to sort your financial life in 2024 | Lisa Conway-Hughes
Do you want financial independence by the time you're 40? 50? 60? Do you know how to get there? That’s why we started the podcast - to give you the knowledge and confidence to change your financial future. So how do you end 2024 in much better shape? Well, that’s why we’re speaking with Financial Advisor Lisa Conway-Hughes who’ll map out the key things you need to get done in 2024 to get better with money and build wealth.
Things to remember from this episode
Lisa Conway-Hughes is a financial advisor, friend of the podcast and creator known as Miss Lolly.
She says being good with money and building wealth is about consistently showing up for a long time rather than being perfect.
You overestimate what you can achieve in a day (or a year) but underestimate what you can achieve in a decade.
Financial goals need to be motivating, e.g. you want to travel the world.
Understanding your numbers (and your plan) can be really motivating because you can picture your life and drive towards it.
Lisa says that as a rule of thumb if you can save and invest half your age each year (as a % of your income) you’ll probably be in good shape, e.g. if you’re 40 then saving 20% of your income. That’s probably a terrifying number, but not having enough money in later life is also terrifying.
Lisa suggests looking at your long term goal (basically retirement) and then looking at your earlier goals on a rolling 5-year timeframe. 5 years is only 60 paychecks which is another terrifying reality.
Plan to have fun early in your retirement. Sadly, Lisa says the latter part of your life is often when you spend a lot on care homes and the like.
As you get closer to retirement your cash buffer should go from 3 - 6 months to a year to maybe three years. This is because you’ll live off your cash in retirement (you’re not earning) and don’t want to take money from your investments to live.
Coventry Building Society is worth looking at for a savings account Lisa says.
Pensions have tax relief on entry, i.e. you can put money into your pension from your gross salary rather than your taxed salary. Check our pension episode, also with Lisa.
Stocks and shares ISAs are great for medium and long term planning. They are taxed on the way in (the money you put in will already have been taxed) but not on the way out (you can pull money out without paying taxes). Check out our ISA episode if you want to understand all of this better.
Your pension provider will typically get picked for you by your employer but their funds can perform badly. Remember you can be getting 9% a year on average from a global index fund or 10% from the S&P 500. Check out our episode with Andrew Craig and our Index fund episode if you’d like to learn more about this.
When you’re younger you can afford to take more risks.
Traditional theory is that investing in stocks (also called equities) will help you beat inflation but bonds will protect your portfolio when things go wrong, i.e. the stock market crashes. This is why a traditional portfolio might have been 60% equities and 40% bonds. But Lisa says the last two years have shown that bonds are actually volatile, they’re not negatively correlated with equities as theorised because when equities fell recently so did bonds. This suggests that bonds aren’t the hedge they were thought to be.
You might want to think about where you put your money according to time horizons as follows:
Cash for the short term, i.e. the next 5 years
Pension for the long term - when you want to retire
Stocks and shares (ideally via an ISA) for everything in between
Most people want the best returns but the best returns (e.g. 100% invested in equities) carry the highest risk, so you need to be prepared for the ride. On any given day, month or year the stock market can go up or down but over the long term, historically, the stock market has always gone up. This means you need to be able to weather the storm when things go down and not sell. Selling when things are down is generally the worst thing to do.
Investing should be boring but depending on your position, and what you can afford, you might be able to have a bit of ‘fun money’ (e.g. investing in single stocks). Damo uses up to 10% of his investments for fun but 90% is in global index funds (via his pension or ISAs).
Should you pay off your mortgage or invest that excess money? This is a very personal decision. Lisa says you should know your numbers and stress test it in your model - and understand your psychology. How much do you value the security of being mortgage free v the possibility of making more through investing?
If you’re going to use money in the short term, i.e. the next 5 years, stick with interest rate products like savings accounts (ISA) where your money is secure rather than investing.
Things to do after this episode
If you’re trying to sort out your financial life, don’t try to change too much too soon or you’ll give up.
Do a realistic budget planner. Look at all your transactions from the last year because we spend different amounts on different things at different points of the year. From that you can see what you’re actually spending, what you can cut down on, what you can save and what you can hopefully invest each month. Check out our budgeting episode.
Then figure out what you want from your life. Lisa suggests breaking down goals into sections: career, property, fun and personal e.g. family. Then get a sheet of paper and break these sections down into i) where you want to be with each of them when you retire, and ii) 5-year chunks, e.g. where you want to be living in 5 years.
Tune into the younger you when you’re thinking about your long term goals. What did you dream of when you were younger? Get a bit of that excitement back. It’s good to dream big. Remember you are designing your life so picture it - e.g. you’re living in that house by a river in France. You should only add numbers to it later.
You can create a model for your life plan using a spreadsheet, or a financial advisor can do it (for a fee of course), or you can use Standard Life’s retirement tools or Aviva’s.
By this point you should have your big retirement goals, and your 5-year goal - but what about the next year? Lisa says you should think about threats in the next year, like getting sick or losing a job. Consider getting some insurance and get an emergency cash buffer (typically 3 - 6 months of income).
Another thing worth doing, if you haven’t already, is assessing your pension by learning:
Who your pension is with. There are often multiple providers.
What you’re investing in via your pension, how it’s performing and what other options there are. Lisa suggests ringing them up, getting the info and then using Google (e.g. Trustnet) to see how your pension funds are performing, including versus the benchmark.
Can you increase your pension contributions, e.g. by asking your employer to contribute more?
Check out this compound interest calculator and play around. The difference between getting 9% v 6% v 3% v 1% is enormous.
Talk to your partner to make sure your goals are aligned.
Forgive yourself for your past mistakes (check our episode with Claer Barrett).
Lisa asks if there’s a procedure you can put in place to keep you on track, e.g. checking what you spent last month?
If you’re buying a property, consider what you can actually afford to pay on your mortgage each month (whilst hitting your goals and living the life you want), not what a bank will lend you.
