How much money do you need to live? What would you do if your financial investments took a hit? And can you really afford that special holiday you want to book?
These are all questions someone facing life post-divorce may well need to answer. Making a new financial plan for yourself is something that can be prompted by any significant change in financial circumstances, but is particularly useful following divorce as you will not only have a new set of financial circumstances, but also other changes in your life to adapt to.
First thing’s first, you need to look at your essential fixed expenditures – these are the things that you have to pay for like mortgage/rent, council tax, bills, child-care costs, school fees, travel expenses, insurances etc.
A good financial plan really should ensure that in the worst-case scenario, your fixed expenditures can still be covered – usually for a period of around 12 months. This is what financial planners call your ‘emergency fund’ – a pot of money that is readily available for you to access should you need to if life deals an unexpected turn.
Once you have the basics covered, you can turn to look at the ‘non-essential’ costs in your life – your discretionary expenditure.
These will vary from person to person and could range from things such as getting your hair cut right through to holidays.
Taking a look at and totalling these up often gives people the biggest shock.
Clothes shopping, entertainment, a meal out with friends, a trip to the cinema, a family day out…all these things quickly add up. Don’t forget to factor in additional costs to the things you do too – although the headline cost of a flight to Spain may seem quite reasonable, you also need to take account of other expenses you will incur – such as transport and eating out whilst you are away.
In the past, where you may have been used to two incomes coming in and splitting some of your regular costs with your spouse/civil partner, you perhaps may not have felt the financial pressure of such outgoings. But when coupled with your essential expenditures, you may need to re-think how you manage and go about your spending.
If you have received a lump sum post-divorce which needs to fund your lifestyle for the foreseeable future, it is vital to properly plan out how this money can be utilised to its full potential for as long a period as possible.
One of the tools we use as financial advisers is cash flow modelling. Essentially, this involves processing the figures around your current and forecasted wealth, along with income and expenditure, to create a snapshot of your finances both now and in the future. It’s a really useful process to go through with clients as it clearly demonstrates the affordability of their lifestyle – or not, as the case may be.
This process is becoming even more important for clients as life expectancy increases. It is forecast that nearly one in five people currently living in the UK will reach their 100th birthday, so any pot of money that is invested will now need to last longer than it would have done in generations gone by.
We also take into account inflation because the cost of goods and services generally goes up every year. For example, if prices increase by 2% each year, over a 20-year time scale the purchasing power of your money reduces by one third.
Sometimes, clients that go through the cashflow modelling process with us receive a short, sharp shock as they realise that if they maintain their current spending habits, their money is going to run out. However, once a sensible plan has been put in place that balances expenditure with a sustainable portfolio, clients are always left in a much stronger position.
Just as things change within an individual’s life and personal circumstances, so too do external factors that can influence the markets. As a result, it can become necessary to review and tweak a financial plan. This is why it’s vital to undertake a review of your financial plan with your adviser on an annual basis. Whether it’s Brexit, a change in Government, or legislation changes, a good financial adviser will discuss these things with clients and how their portfolios may need to be adjusted accordingly.
For example, between 2015 and 2018, the majority of investors experienced a buoyant three years, meaning even after drawing an income out, the purchasing power of their money would have remained due to the overall growth of their investments.
But then we hit the end of 2018 and suddenly there was a nosedive in the markets. We’re now having to prepare clients for the fact that they may have to pull in the purse strings – it has been what we call a ‘flat year’ with most people being lucky to be level or any form of positive return.
This is where we can show our real value as financial advisers. It’s our job to ensure that clients make informed decisions regarding their money and that it can ultimately help them to achieve their lifestyle and financial goals in both the short and long term.