Over the past few weeks, we’ve been talking about the value of good financial advice – particularly from a financial professional.
But unfortunately, there is a lot of financial advice online and a lot of advice people routinely give each other, which can be misleading.
I’ve put together a list of four common pieces of financial advice which many people take for granted – but which you should treat very carefully.
1. Buying a house is always a safe investment
Nobody buys a house and expects to make a loss on it.
That’s why the phrase, “Safe as houses”, means something that is a sure bet.
My wife and I bought our first house in 1991. Having saved hard for a 10% deposit of £6,000, it felt like a safe purchase – a two-up, two-down for £59,999.
Five years later, we sold the house for £55,000.
The market had dropped, and we lost our whole deposit from 1991!
Many other people have fared even worse in the property market.
They have been unable to sell at all, because they buy at the height of the market and then, when prices fall back, are stuck in negative equity (when their mortgage is larger than the value of their house).
So while an investment in property often does pay off, you can’t take for granted that it will.
2. Paying debt should be your only priority
Of course you want to pay off debt – it is key to your financial future – but whether or not it should be your top priority is complex.
Not all debt is the same. A debt on which you are paying a very high rate of interest might be treated differently to a low-interest loan.
And in some cases, especially if you know that you will end up paying off your debt eventually anyway, you might be better off prioritising your savings.
If your employer offers a matching contribution for your pension payments, for example, it might be smart to invest as much as possible into your pension pot, as the return on your investment may be high, relative to your employee contributions and the benefits of tax relief on contributions.
This is the kind of issue a financial adviser can help you consider carefully.
3. Save 10% of your income towards retirement
Why is this, potentially, a bad piece of advice?
Because in many cases, 10% is too low (for example Scottish Widows recommends 12%, and the DWP quotes a figure of £38k as the income most people want in retirement).
The stark reality is that most people do not save enough towards retirement when they are in their 20s and 30s.
By the time they hit their 40s and start thinking more seriously about their pension, there is a lot of ground to make up. As I always say, it’s better to pay in half as much for twice as long, than twice as much for half the time.
Your financial adviser will be able to help you work out exactly how much you should be putting into your pension to be able to retire when you want, and lead the lifestyle you want.
But if you leave it too late, 10% might not be enough.
4. You don’t need an estate plan unless you are very wealthy
It is an uncomfortable topic to think about, but no matter how much money you have, you need to make plans for what will happen to your assets if the worst happens.
You should set out your wishes in your will, so that your loved ones know how you want to distribute your assets and can follow through. Don’t forget to talk to your beneficiaries in good time, about what your will contains. Make sure they are prepared.
If you have young children, make sure you have named guardians.
Think about Power-of-Attorney in case you can no longer manage your own money, or make decisions regarding your health.
Put financial arrangements in place, in case you need care.
None of these depend on how much money you have. Everyone needs to take care of their loved ones, and plan for what might happen in the worst-case scenario.
And speak to a financial adviser about how to legally minimise the Inheritance Tax bill on your estate. Your estate may be larger than you realise, especially given property prices, and again, you do not have to be super-wealthy to take steps to reduce the tax bill.
What is the worst piece of financial advice that you have ever received?
I’d love to know – Just drop me an email to share your story with me.
Wondering how to legally minimise your Inheritance Tax bill?