Planning your financial protection with the House of Wealth
As with anything we don’t know a lot about, financial planning can be very complicated. I wanted a way of organising the fundamental areas of financial planning in one simple diagram, so along with some colleagues we developed the House of Wealth:
It has four sections: the foundations and three storeys. The foundations are things that EVERYONE should consider – the first three are essential, and the next five you should evaluate as to whether they’re necessary for you.
This is the amount of money you need to hold to cover any emergencies, such as your car breaking down or the boiler going; it’s not for a school trip or socialising – it’s for emergencies only!
I tend to say that if you have unsecured debt on credit cards or loans, repaying this is your priority. However, if an emergency happens while you’re doing that then you’re going to be stuck. So if you have unsecured debt, I recommend saving £1,000 as an emergency reserve. For some people that’s an amount they’ve never saved, so it’s a challenge and a goal in its own right that should be approached with every bit of passion and tenacity possible.
Then once you’ve paid off your unsecured debt, increase your emergency cash to anything between 3-12 months of your expenditure. The reason for the variance is that if you’re an employee and live on your own, 3 months is probably sufficient; but if you’re paid on a commission-only basis or have other people relying on you financially, towards 12 months is advisable to be prepared for the worst, like losing your job. If you’re unsure, then aim for 6 months. Remember, that’s 6 months of expenditure – not income.
Who’s it for?
Everybody. We should all have an emergency cash reserve, whatever your circumstances.
If you’ve watched or read any of my other content, you’ll know that I’m always talking about the importance of wills. If you have dependent children it is absolutely essential to have a will – and I’d go as far as to say it’s negligent not to have one. It’s a legal document that tells people what to do with your estate in the event of your death. It says who should get certain items such as property, but most importantly it details who should care for your children. If both parents pass away without a will then social services will step in to look after any minor children, when all they’ll want is to be with people they know, trust and love in a familiar environment.
Who’s it for?
Everybody, especially those with dependents. Even if you’re not a parent, I think it’s good practice to have a will. It can also include your funeral wishes.
Lasting Power of Attorney
An LPA is a document for when you’re unable to make decisions on your own behalf. There are two types:
- Health and welfare, which covers your medical decisions and enables your partner, family member or someone you trust to be able to talk to social services in the event of you not being able to do it yourself.
- Property and affairs, the financial LPA, which enables someone to make financial decisions on your behalf, from drawing money to paying care fees to selling certain assets.
In the event of you being mentally incapacitated without an LPA, your family will need to get deputyship from the Court of Protection, which is a time-consuming and expensive process – during which time nobody you know and trust is making decisions for you.
Once you’ve completed a power of attorney, which you can do online, remember to register it with the Office of the Public Guardian.
Who’s it for?
Everybody, without question. LPAs and wills are simple documents, take a little time to get them done!
Typically, this comes in the form of term assurance. Make sure that the policy covers your debts – your mortgage plus any unsecured debts – and add around £5,000 for funeral expenses. You’ll generally find that if you’re in a relationship with a joint mortgage it’s more cost-effective to have two separate life assurance policies rather than a joint one: if both you and your partner were to die then beneficiaries would receive a double pay-out, and a single policy can be paid into a trust, which speeds up payment and keeps it outside of your estate.
Who’s it for?
Everyone with dependents. If you’re single and have equity in your property, this is probably not that important. If you’re in a relationship and one of you doesn’t work, then consider life assurance carefully. You could also consider income life assurance in such circumstances.
Income Protection, AKA Disability Insurance
This covers you if you’re unable to do your own job through accident or long-term sickness. There’s a waiting period of anywhere from four weeks to a year before pay-out, and the longer you make that waiting period, the cheaper the premiums. So link this back to your emergency cash – if you have 6 months in reserve, then you could be fine waiting a while before a pay-out, reducing your costs.
Who’s it for?
For the self-employed this is almost essential. Employees may also want to consider this depending on the level of long-term sick pay offered by their employer.
This covers your home, car, travel and so on and it’s an area where you can make great savings through online comparison sites. It’s important to make sure you have adequate insurance – many people are under-insured on their property or its contents. Shop around and you should find a good deal.
Who’s it for?
Everyone with valuable assets they’d like to protect. Drivers must have car insurance of course, and all homeowners should have adequate cover.
Consider looking at the Money Saving Expert site for comparisons.
The following two foundations are worth considering depending on your circumstances:
Critical Illness Insurance
This is generally a term insurance policy which pays out a lump sum on the diagnosis of a listed critical illness. With critical illness policies, it’s important not just to go for the cheapest premium, but to consider how comprehensive the definitions are.
Consider this only once your unsecured debts have been repaid. It can be a little more expensive than other insurances but can help if you take a policy that covers your mortgage, for example.
Private Medical Insurance
We’re lucky to have an outstanding NHS, but some people may want to be seen faster through the private medical system. It can be particularly useful if you have a curable ailment that prevents you from working, as it can get you seen and back to work quickly.
There’s an excess payable which I recommend making as high as possible, around £250 or so, once you have your emergency cash reserve funded.
As with the Critical Illness insurance, consider this only once your unsecured debts have been repaid as it’s not really essential thanks to the NHS.
After you’ve got the foundations in place, it’s time to make progress on your financial journey. Progress is important, which is why we divide the next steps into three separate milestones, or storeys, in your House of Wealth.
We define financial security as having all your unsecured debts repaid and having a fully-funded emergency reserve. Getting to this stage is not simple and it’s more than most people manage in their lives, so congratulate yourself when you do achieve security.
I consider financial independence as having sufficient investment income outside of your salary to meet your basic living expenses, which can be defined as your Bills Account payments – things like rent or mortgage, utilities, and general spending money.
As a general rule of thumb, you need approximately 300 times your monthly expenses saved to generate sufficient income to achieve this – if your basic living expenses are £1,000 per month, you’d need around £300,000 saved at an interest rate of 4% to cover this.
This is the stage at which your current lifestyle, or the lifestyle you aspire to, is completely financially covered without the need to work again. That means on top of your basic living expenses, you also have sufficient returns to pay for any general lifestyle choices.
Using the example above, your financial freedom figure may be £2,000 per month to include things like holidays and a car on top of your basic living expenses. So now you’d need a capital sum of money of £600,000 at a return of 4% to achieve this.
Remember that for both freedom and independence, your income can come from various sources and not just one investment; you might have a business or rental property, a portfolio, or later on the state pension, that can provide some of the money. What you’re looking for is a recurring income to meet your expenses, replacing an earned income with a passive income.
It’s all about having choices and going on a journey where you can see your progress. Momentum matters, so plan your finances carefully and enjoy adding each storey to your own House of Wealth.