Investing and making sure our financial plans continue to work even if we don’t

As far as I can tell, investing is one of life’s best cheat codes. If you remain disciplined with regular contributions or lump sums, no matter what the headlines are saying, you can be reasonably confident that, over the long term, your money will grow. Often significantly. I see this so often with our clients here at Lexington, but the bit that often gets overlooked is what must happen before investing can begin.

I know this isn’t glamorous, but it starts with getting financially well organised. Not the most exciting phrase in personal finance, admittedly, but every pound should have a purpose. If you don’t know what money is coming in and what money is going out, how can you be financially well organised.?

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Allocations

As a rule we suggest allocating 50% of your income to your fixed overheads; rent/mortgage, utilities etc, 30% to your variable expenditure; groceries, general spending money, and 20% retained for your future self; overpaying on your mortgage, investing, or a combination of the two.

In the first instance, you should ensure that you have an emergency fund for the unexpected, we suggest between 3 and 12 months of your expenditure. Last week, on her way to work, the water pump in my wife’s car decided to stop working. It was inconvenient, frustrating and not exactly how either of us wanted the week to begin. But there were two elements of being financially well organised that meant this didn’t become a bigger problem.

Insurance

First and foremost, insurance. In this situation, that meant RAC breakdown cover. For many of us, though, the same principle applies more broadly: making sure our financial plans continue to work even if we don’t. That might mean income protection, critical illness cover or, should the worst come to the worst, life assurance. Back to the breakdown. The RAC met Jessica at the car park, assessed the situation and, knowing they couldn’t fix the car there and then, they brought Jessica home and towed her car back. They also booked a mobile mechanic to come out a few days later to replace the water pump. Without suitable cover, this would not have been possible or would have resulted in a great deal of additional inconvenience. However, we also had to consider the cost of repairs: £356 on this occasion. Granted, not a great sum to many, but unexpected, nonetheless.

Emergency Fund

Fortunately, we have an emergency fund for exactly this reason. We didn’t have to think about where the money was going to come from, and we didn’t have to go without something else to pay for the repair. It was already built into our plan. Having experienced both having no emergency fund and having one, I can tell you that I worry far less with one when these incidents crop up. And they will crop up.

Now that I have a small dent in my emergency fund from the water pump, I simply redirect next month’s savings until it is replenished. Always keeping 3 to 12 months of my expenditure needs in cash and accessible.

Investing

Once you have your emergency fund fully funded, no unsecure debt, and a spending plan that works, you should consider investing. Maybe you’re just getting started. Perhaps you’re already investing but could be doing it more intentionally. Could you be doing more? Should you be doing less? We recommend that as a guide a minimum of 20% of your income is used for your investments and/or debt repayment. Put it in your plan and pay yourself first. It’s too easy to say, “I’ll invest what’s left over at the end of the month.” But how often is there anything left over? If you pay yourself first, you’ll never miss it, and over time you’ll be giving yourself more choice, more flexibility and more options in the future.

What’s your best budgeting hack?

Keep compounding,

Christiaan