Tom Donlea is a financial advisor at Castell Wealth Management.
One of the most common questions I am asked at the moment, particularly by high-earning or high-wealth clients, is “what should I do with my cash?”. It’s a highly-relevant question, particularly what with the Chancellor potentially needing to adopt new methods to pay off the high levels of debt that the country is taking on as a result of the coronavirus pandemic.
Whatever stage of your legal career you are in, I would recommend keeping enough money in a cash account to cover your day-to-day expenses to cover at least three months, in case of any unforeseen circumstances. Beyond that, putting the time into building a plan that includes your monthly saving goals is key. As it stands though, the interest you can accrue within your bank is account is very low. Using example figures, if inflation is 1.79% on average and your bank is paying you an interest rate of 0.10%, then you are effectively going backwards to the tune of 1.69% per annum. This (not including inflation) will mean that any cash has effectively halved in value in 42 years. You can however make those regular savings work harder for you by linking your savings approach with an investment strategy.
Before diving into this, it’s important to consider the actual objectives you are working towards. On a professional level, one individual will be hoping for the dream counsel role whilst another may be focussed on becoming an equity partner. On a personal level, one client will be looking to minimise the capital gains tax they owe on the property they just sold, and others will be looking to safeguard their estate to minimise the inheritance tax liabilities. Some of those objectives will be short-term, some will be mid-term, and others will be long-term. For short-term objectives, i.e. less than three years, you might decide to keep the investment in cash accounts, minimising volatility. For investments relating to medium/longer-term objectives, for example buying into a firm as an equity partner, you would be wise to consider investing in a diverse and well-constructed portfolio. An increasingly popular topic with regards to investing is sustainable and responsible investment. It’s something that I myself am passionate about, and I shall be delving into this in more detail at another time.
Plan for your long-term future
You could also consider planning for your long-term future by evaluating and strategising your pension(s). That sentence probably isn’t the most exciting thing you’ve ever read, but for many people their pension fund is one of the aspects of their life that they know least about, despite it often being the second largest asset they own. Law firms tend to offer pension contributions that are well in excess of the legal minimum of 3%; and the earlier you start to contribute, the greater the effect of compound interest over time. It’s a complex area, and one that involves a deep understanding of the various rules around it. Tapering rules are one such example. These regulations mean that the amount that you can put towards your pension on a tax-efficient basis can dramatically reduce from £40,000/annum to just £4,000/annum depending on your earnings.
Pay off debts
This is an option worth investigating, particularly for high-interest debts such as those that come with credit cards. Interest rates on debts such as mortgages are however at historically low levels, and partnership capital loans are generally available at reasonably low rates too. Choosing to service the interest on mortgage debt and sensibly invest the money that you could otherwise have used to pay off the capital is worth considering. A question I often ask clients is that if paying off a mortgage minimises your capital to the point that you can’t achieve another objective, is it worth it?
Spending your money is not fundamentally bad. Whilst most of us are likely capable of saving more, you probably work long hours and deserve the rewards of your labour. However ensuring that realistic levels of both essential and discretionary spending are built into your personalised financial plan is key. Working in this way helps you take an honest and realistic view of your outgoings, and allows you to remove guilt from your spending.
How to decide how much goes where
I would love to provide a one-size-fits-all answer to determine what exactly to do with your cash, however it would be both impossible and irresponsible. It’s such a personal thing. Everyone has unique situations and aspirations. We work with our clients to understand what is most important to them, then strategise and action a personalised plan that paves the path to success with their financial goals. It’s never too early to start planning for the future.
Castell Wealth Management
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. Equities do not provide the security of capital which is characteristic of a deposit with a bank or building society.
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.
Castell Wealth Management is an Appointed Representative of and represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group's wealth management products and services, more details of which are set out on the group's website www.sjp.co.uk/products.
Castell Wealth Management is a trading name of Castell Wealth Management Ltd.