Modified on: June 2023
Financial stages of life – saving vs spending
Financial stages of life
As a Certified Financial Planner (CFP), the question I get asked the most is “what should I do with my money?”
The answer, as always, is âit dependsâ. Thatâs not to sound vague, but it depends on where you are in life.
To keep it simple, there are broadly two financial stages to life, the saving stage and the spending stage.
The saving stageÂ
If youâre still working, then youâre probably in the saving stage.
Each month, you save a bit of your income, either into a bank account, an investment, or a pension. You put away money today for the benefit of tomorrow.Â
How much should you save?
Whilst everyone’s situation is different, you should aim to save about 20% of your net income. This includes money you save into your workplace pension.Â
If youâre not saving 20%, youâre probably not using my 3 Buckets approach to saving.
It’s about getting the right balance between living for today and saving for tomorrow.
Where should you invest your money?
This is less important than how much you save, but still worth spending a minute on.Â
Investing seems complicated, but itâs really not. All you need to do is get the right mix of investments, make sure they are well diversified, and then leave them alone.Â
If youâre fairly early on in the savings stage, you’ll want to take a higher level of risk. This will help your investments to grow at a faster rate, but it will come with more ups and downs.Â
As a Certified Financial Planner, I’ve spent thousands of hours researching different investments. I’ve distilled these into 7 Simple Steps which anyone can take to improve their investments.
Whatâs the biggest risk?
The biggest risk during the savings stage is suffering an illness that prevents you from working. In my work as a Certified Financial Planner, I have seen people’s finances completely derailed because they have fallen ill and are unable to work. Where you invest your money doesnât matter if you donât have any money to invest.
This is why income protection is so important. It provides a replacement income if youâre unable to work.
The spending stage
At some point, youâre going to reach financial independence. This is where you have enough money so that work becomes optional.Â
Moving from the saving stage to the spending stage takes a psychological shift. You move from being a lifetime saver to a lifetime spender. Itâs a big shift and takes some getting used to.Â
How much should you spend?
Many people worry that they will run out of money in retirement. Itâs the single biggest thing that keeps people up at night. The problem is, most people wonât know for sure until itâs too late.
Whilst everyone is different, a widely accepted view is that you can spend around 4% of your money each year in retirement. So, if you have a pot of Â£200,000, you can withdraw Â£8,000 per year.Â
The â4% ruleâ however is just a starting point. It oversimplifies what is an incredibly complex calculation. For example, it doesnât take into account your other assets, incomes, expenses, and liabilities. It also doesnât take into account how long youâre likely to live for.
This is where working with a Certified Financial Planner can help. By using some fancy software, weâre able to forecast your future finances and answer the question of âwill I have enough?â.Â
If thereâs one time that absolutely everybody should get financial advice, itâs when theyâre approaching retirement. I know this is self-serving, but itâs far too important to leave to chance. If you’re thinking about retirement, book in for a free retirement income review.
How to withdraw money in retirement?
After you know how much you can spend, the next question is how to withdraw money in retirement. Chances are, youâve got a couple of different âpotsâ – pensions, ISAs, savings, and the like.Â
For most people, the best way to withdraw their money is to use their savings first, their investments second and then their pensions last. The reason being that this is (generally) the most tax-efficient way, although it will, of course, depend on your personal circumstances.Â
If youâre approaching retirement and want a hand with your retirement income planning, feel free to book in for a free retirement review.
All the best,
James Mackay, Independent Financial Adviser in Bristol
Financial Advisor Bristol and Pension Advisor Clifton
About us: Frazer James Financial Advisers is a financial advisor, based in Clifton, Bristol. As an independent financial adviser, weâre able to provide independent and unbiased financial advice. We provide independent financial advice, pension advice, investment advice, inheritance tax planning and insurance advice.
If you would like to speak to a Financial Advisor, we offer an Initial Financial Consultation without cost or commitment.Â Meetings are held either at our offices, by video or by telephone. Our telephone number is 0117 990 2602.
Frazer James Financial Advisers is located at Square Works, 17 â 18 Berkeley Square, Bristol, BS8 1HB.
This article provides information about investing, but not personal advice. If you’re not sure which investments are right for you, please request advice.
Remember that investments can go up and down in value, you may get back less than you put in.