You may already appreciate the importance of goal setting for your personal finances. And by this, we mean reasonable, rational and measurable goals. But what happens when you have multiple goals? As most people do; and more importantly, how do you prioritise and decide the trade-off?
Knowing if your ideals are compatible with the bigger picture, and your life aspirations are also something people fail to check. After all, wealth is merely a vehicle for getting you to where you want to be.
This is why we have chosen to talk about your wealth personality. We’re all unique; in our circumstances, in our wishes for our future, and with our goals. People will fall into one of two categories; these being Legacy or Freedom.
The difference between legacy and freedom mindsets
Your life aspirations and your hopes and dreams for the future will shape your investment habits. Here’s a quick explanation of the difference between legacy and freedom mindsets.
A Legacy Mindset is shared by people who want to maximise their wealth and pass it down, possibly to their children or a charity of their choice. For those with a legacy mindset, this brings the question of what is possible, given their willpower and hard work.
A Freedom Mindset applies to people who want to build “enough wealth” so they don’t have to work for money anymore. Instead, they have the freedom to explore other opportunities life has to offer. The ideal for those with a freedom mindset is to be able to retire early. This brings the question of how much money is enough?
Why does this matter?
When you set your financial goals and create a wealth plan for your future, knowing your end goal (life inspiration), and having a clear picture of what you want to do with your money is essential. Different aspirations require different strategies. Regardless of your mindset, you’ve got to understand where you’re going before you plan your route.
So, which camp are you; Legacy or Freedom?
How do these mindsets relate to your financial goals?
Key considerations for a Legacy Mindset
To build a legacy for your future, one needs to know their preferences. You’ll also need a little bit of science, and self-discipline. Let’s break this down and give you a few practical examples.
Preference – Knowing how to balance the big-ticket purchases needed today with wealth accumulation goals for the future.
Let’s look at a practical example of paying for private education today vs investing that money to generate a large sum with a compound return. These numbers may surprise you:
£30k p.a. after tax is at least £50k p.a. before tax for those on the higher income tax bracket. Considering the investment of that money each year at 5% p.a return; over 20 years, this equates to the incredible sum of £1m.
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A common mistake made here is that some individuals will maximise their budgets for their homes. After all, with all the hard work you endure, you deserve it, right? However, your home is NOT an income-generating asset, nor is it your retirement pot.
Science – Knowing how to invest at the right level of risk. Having a good wealth manager makes it easy for you to identify your personal risk profile. That will depend on both your preference, investing knowledge and experience (known as risk appetite) and your financial circumstances such as asset level, liquidity ratio and debt level (known as your risk ability). Wealth managers will build your investment strategy based on your risk profile. A riskier portfolio will contain more volatile assets (emerging market equities, for example), which have greater growth potential. A more cautious portfolio might lean more heavily on government bonds and corporate bonds – assets that are safer but will probably return less over the long run.
Nowadays, too many people hold onto too much cash which is constantly eroded by inflation, or they solely buy BTLs (buy-to-let properties) which are not tax-efficient, attract high transaction costs, and present a level of concentration risk. Another typical behaviour of legacy personalities is under-investment. In many cases, a legacy mindset worries about fluctuations in the market, and because they don’t like the market volatility, investments are usually made with a low risk profile and therefore generate sub-optimal returns.
Discipline – You need to save a reasonable amount of your earnings, and invest continuously, without engaging in highly risky activities, such as frequent trading, speculation, or too much leveraging.
To pass on your wealth, an efficient tax structure needs to be put in place; aside from setting up tax wrappers such as pension and ISAs, inheritance planning is required.
Key considerations for a Freedom Mindset
To achieve earlier financial freedom, one needs to start saving and investing as early as possible, and it requires much hard work. Albeit risky, entrepreneurship is one important avenue. And it is important to have a clear lifestyle expectation and manage it accordingly.
You need to know how much money is enough. The more expensive your lifestyle is, the more money you will need to retire.
Ask yourself, how much money do you need to spend each month to make sure all your needs fully met? Some people need £1k, while others need £50k. There’s no right or wrong answer.
For £5k per month; post-tax this equates to £60k p.a.; pre-tax the figure is roughly £100k. Let’s assume a 4% income-oriented return rate; this will need a pile of £2.5M in financial assets to generate the outlined perpetual income stream needed to cover these expenses. For £50k per month, you’re looking at needing £25M.
The core factor to consider here, is that your asset pile outlives you.
According to the latest UK average lifespan data, which was released in 2018, the average life expectancy for a male is 79years, and for a woman, it is 83 years. Now, you can use those figures (and better factoring in a 10-20% buffer), to work out exactly how much in assets you need, or you can useRosecut planning platform to find out what that figure might look like for you.
This will tell you the answer to ‘when you can retire’, but before you get there, you need to generate income, and save as much of it as possible. Investing early is essential, and knowing the true cost of a ‘free life’ is also key.
A common mistake many people make is that they start to seriously overspend in their lives after making a decent income, this is called “lifestyle inflation” (we will have a separate post to elaborate on this and how to manage it). However, if the income from your salary does not translate into assets that can help you generate a passive income, then you do not get to stop working for money and retire!
So, we have already been talking about personal financial planning; a very important topic that is often and all too easily forgotten as we go through our weekly, monthly, and yearly routines. This post intends to get you thinking about your wealth mindset and help you understand the priory questions you need to ask if you want to achieve your long-term financial goals.
Even with professional help, personal financial planning is a time-consuming, challenging task. But with something so important, you cannot take any chances. We know you understand the concept, but the benefits and importance of this activity, when done right, will guide your investment decisions, and help you stay focused on the bigger picture.
You probably noticed that we haven’t touched on the topics of stock picking or portfolio construction, because while these are meaningful phases, they only become relevant once you have established your overall strategy.
You’ve already made it this far; with the right support, planning, and understanding of what needs to happen for you to reach your goals, you can look forward to realising your wealth potential, and stepping closer to financial freedom.
Rosecut can help you with a personal financial plan that focuses on your life goals; everything we do is for you. If you haven’t already, you can sign-up here today.
Rosecut is a digital wealth manager that shows you your future net worth with one tap, and how to invest to get there. We use expert knowledge and artificial intelligence to truly understand you in order to help build a financial plan and investment strategy that works for you.
The company was founded by former Credit Suisse and Coutts advisor, together with a technologist, aiming to provide the best client experience enabled by private banking expertise and technology. We cater to people of rising wealth, who appreciate the value of impartial advice and discretionary management.
The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies.
You should be aware that past performance is no guarantee of future performance.