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Dream more, worry less: how an ISA can change your life

According to Moneyfarm’s data, a staggering 43% of the UK is financially dependent on someone other than themselves. 35% admit that finances have brought a romantic relationship to an end. Across the nation, financial pressure is actually the top cause of stress outside of work (coming in at 37%).

Those three numbers tell us what a huge role money plays in the way we live our lives. It also gives us a clear insight into our nation’s fundamental flaw: realistic financial management. We are clearly not preparing for the future in the right way.

Work backwards

If you jumped in the car, started driving and paid no consideration to where you were going, you would be highly unlikely to turn up in the right place at the right time. The whole process would be bizarre and unrealistic. Your friends would probably suggest it wasn’t the best excuse for turning up late for a party!

And yet that is exactly the approach that so many people in the UK take towards their financial planning. They know they need to put some money away, so at some point they invest in a fund or buy some shares. They may add some bonds or a high interest account. And then they leave it to grow with fingers crossed that they can make ends meet in the meantime. If they can’t, those long-term investments just have to satisfy short-term needs.

That is, of course, better than doing nothing. But it doesn’t map supply against demand. The challenge is that when we put money away we do so surrounded by uncertainty. There are so many factors to consider that it feels easiest just to put our faith in the idea that everything will turn out for the best. Which isn’t an investment strategy with a brilliant track record!

This is one reason that so many people in the country are in such a weak financial position. Not just young people relying on their parents, but also the 22% of 18 to 30 year olds in the UK who are supporting their parents.  This has been a challenge for generations, particularly since the shift from ‘defined benefit’ pensions to ‘defined contribution’ which are, by definition, less certain about future outcomes.

Plan for the known

There are some future expenses we know we can expect to incur. Like our funeral! In the shorter-term (hopefully) there might be a deposit on a property, a new car, a holiday or planned retirement date. Many of these are front of mind when we make our plans. Many of us understand what’s possible within our current income bracket and we make choices accordingly. We can calculate roughly how much we will need to pay for food and drink each year, for heating the home, going out and buying clothes. Again, we can adjust these to the amount of wealth we have at our disposal.

Start imagining the unknown

But things get tricky when we try to imagine a future that is very different to our current lives. If we are single, it is hard to imagine having to afford the cost of a wedding. So it quite some leap forward to then start calculating the 50% chance of divorce!  Which is why 27% of people in a partnership admit that their financial situation is the only thing stopping them from leaving. As worryingly, 31% of married people in Britain claim they would be forced to stay with a spouse who was cheating on them because they couldn’t afford to leave.

This may not be an enjoyable train of thought, but for many it is highly realistic. As is the likelihood of a second marriage. Or of requiring time off work to deal with a family illness. Or of the family outgrowing its cosy two bedroom property. Simply affording a child can be mind-boggling. Our research 5 suggests that parents need to budget for between £7,100 and £18,100 each year. That’s without fees for private school or tertiary education or helping them get a foot on the property ladder. And let’s not forget that (according to the ONS) 3.6 million Britons aged 20 to 34 are still living with their parents!

At Moneyfarm, the last thing we want is for you to marry badly or avoid having a child because it costs money. So we simply advise you to plan sensibly.

Be a dreamer

It’s not often that you will hear financial experts telling you to daydream! They tend to be too busy analysing the numbers! But that’s exactly what we suggest. Because you can only begin to plan for life’s many expenses when you imagine what they might be. Anyone can tell you what they need to spend this week, or even this year. On the other hand, a single thirty year old with what feels like more money than they need right now, might see things very differently if they marry in 2028, start a family in 2035, want to buy a ski chalet in 2045 and retire to the country in 2060!

So scribble down your dreams. If they seem unrealistic, adapt them. However much you love young people, you may begin to understand the impact of having a third child on your
retirement age. You will see that the big white wedding could mean a number of sacrifices elsewhere.

You are not expected to have all the answers. In fact, one in four Britons say it is neither looks nor personality that they find most attractive in a partner. It’s financial responsibility! Which ties-into the finding that millennials engaging with a financial planner are three times more likely than others to report having high levels of overall well-being!

It’s time to dream and then to work backwards, step-by-step, to make that dream come true!

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*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.