Like Maslow’s Hierarchy of Needs – a model for understanding what motivates and fulfils us as humans – the Financial Planning Hierarchy illustrates the various stages which can guide us towards our financially secure future. We start with an emergency fund saved at the beginning of our career and end with the management of the estate we leave behind.
Emergency fund
This ensures you have enough cash reserve available to meet any unforeseen needs. This can be cash in your pocket, current account, savings account and/or ISA and amounts to three months’ expenditure* to buffer any unforeseen costs.
*Source: Money Advice Service 2020: Emergency Savings – How much is enough?
Financial Protection
Income Protection Insurance supports you financially if you are unable to work due to illness or injury. Life Insurance will pay dependants as a lump sum, or regular payments if you die unexpectedly. Critical Illness Cover will pay out if you suffer a specific life changing condition.
Retirement Planning
After protecting your wealth and your health, next comes saving for retirement. This can be met through various means with the most common being a pension, which could run alongside a tax efficient Stocks & Shares ISA, complemented by property, such as your home, to ensure diversity.
Savings & Investments
Life’s most precious commodity is time. The earlier you begin saving for your future the more compound interest you will earn. This is because each time interest is paid onto an amount saved, the added interest also receives interest from then on. So effectively you receive interest on the interest.
Inheritance Tax (IHT)
This is a tax on your estate (property, money and possessions) when you die. The standard IHT rate is only charged on the part of your estate that is above the threshold. Taking advantage of government allowances available ensures you keep any tax bill for your descendants to a minimum. For the latest information on IHT visit https://www.gov.uk/inheritance-tax.