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.
1 Emergency fund
A financial planner will always advise having an emergency fund as savings before anything else to meet any unplanned expenses or financial emergencies. This can prevent you from maxing out credit cards or taking out a loan, with the risk of paying high interest rates. Decide how much you’d require – three to six months is the average1 – and keep this in a separate account earning interest; it’s good to ensure the cash is accessible but not part of your everyday funds. So, if you spend £1,000 a month on mortgage or rent, food, heating bills and other essentials, you might aim for £3,000 to £6,000 in emergency savings.
2 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.
3 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.
4 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.
5 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.
Don’t hesitate to get in touch for a no obligation conversation if you need any help with your financial planning.
Source
1 Money Helper September 2024: Emergency savings – how much is enough?
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.