Getting started with Basic Planning
You should have a good idea about financial objectives and the priority you attach to each one, as some of these objectives will concern your protection needs.
You may be interested in mainstream savings and investment objectives.
Clearly, these will vary from person to person, but essentially they will fall into three broad categories:
- Providing a lump sum sometime in the future either by investing a lump sum now or by saving regularly.
- Providing an income now by investing a lump sum.
- Providing an income sometime in the future either by investing a lump sum now or by saving regularly.
- You might narrow down your choice of investments and methods of saving to find the most appropriate ways to meet your financial targets. Herein a wide range of factors should be taken into account. The charts concentrate largely on risk because this is the factor above all others, which most often seems to cause problems.
Beware of seduction
Numerous financial scandals have revolved around investors being seduced into products that promised exceptional returns at seemingly little or no risk. Sometimes governments issue such investments, but in the commercial world risk and reward always go hand in hand. If you want the chance of high returns, you must be prepared to take on extra risk.
The charts invite you to think of risk as a continuous scale from one to ten. If you place yourself at one, you are very averse to risk and should select savings and investments that carry the minimum of risk. Moving along the scale, you become more comfortable with risk and, at ten, you positively enjoy taking a gamble.
To make a particular financial decision, your attitude towards risk may be influenced by the extent to which you are already on course to meet your most important financial targets.
You should work through the charts for each financial target you have identified; bearing in mind the priority attached to each one. For example, should you be at the start of your financial plan, needing to build up an emergency fund and with little cash to spare, you should normally be very averse to risk. As your main financial building blocks fall into place, you may be comfortable taking greater risks with the lower priority targets.
Costs of Setting up an Investment Programme
Just as you need to know the after-tax return for you personally, you need to know the after-all-charges return to build a clear idea of what you stand to gain through a particular savings or investment medium.
Some products are very simple:
For example, when you save with a building society, you are quoted a particular rate of interest.
The rate has been pitched at a level which (taking other factors into account) is expected to cover the society’s costs. What you are quoted is what you get net of charges.
Watch out for interest penalties if you cash in term or notice accounts. Most packaged products (Life Insurance, unit trusts, Pension Schemes) are more complex, with a variety of different charges, management fees, upfront charges, surrender penalties, switching fees, and so on. Trying to understand the impact of all these charges can be a nightmare.
Nonetheless life insurance and pension providers have had to provide illustrations of the possible return from their products, netting out the impact of their own charges on the return you get.
Fees and charges
Trying to understand the impact of all these charges can be a nightmare. Nonetheless, life insurance and pension providers have had to provide illustrations of the possible return from their products, netting out the impact of their own charges on the return you get.
The third group of investments are those that run up dealing or transaction costs when you buy and sell them. These include most shares, gilts and corporate bonds. When assessing the return you might get, you should deduct what you will pay in stockbroker’s commission, stamp duty, and so on.
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