Today we’re going to be talking about the three uses of money. I have found myself reminding clients of these three uses often recently. Particularly when meeting new clients, I use this conversation to instill from the start that money is not an end in itself, but a means to an end. More on this as we go on of course…

Just to give you a heads-up on what’s going on in this session: we’re going to look at some iTunes reviews in a sec, then I’m going to talk briefly about a couple of news items. Then we’ll cover today’s topic, and at the end, we have a great listener question from Andy in Leeds.

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That’s where we’re going – are you coming along for the ride?! By the way all the links that I talk about in the show are, as always, to be found at the shownotes. There’s only one link you need to remember: meaningfulmoney.tv/session32

This week’s reviews

Three more reviews this week – we’re on a roll!

James Hawkswood says:

“I really appreciate the concise info explained in a clear manner. Would recommend to anyone looking to improve their personal financial acumen. Keep up the great work.”

Cheers James, anything I can do to increase the financial awareness of the nation is time well spent. Next up is _Marc S, and he says:

“Like many others, I discovered this recommendation from The Property Podcast and Pete has been a welcome part of my weekly routine ever since. Meaningful Money covers a wide range of personal finance topics that will interest all listeners from the financially clueless to the more savvy money saver. Pete has a very natural and engaging presenting style and is able to keep even the driest of subjects entertaining. Also highly recommended are the approx 300 videos on the  Meaningful Money website. Great work Pete!”

Marc, you’re a legend, sir – thank you very much for those kind words. Finally we have Manncubdad:

“What you need to KNOW: This is an excellent series of podcasts for anyone that wants to get in control of their finances, both now and in the future. Pete is very very knowledgable and he explains every subject in simple and easy to understand terms. He’s funny too – an honorary Janner!

What you need to DO: Subscribe, download, listen, act on the excellent advice, rate five stars”

Fantastic! I had to look up what a Janner was, and I *think* I’m happy to be called that!

I’ve got to say how much I appreciate all your encouragement. Thank you to everyone who has taken the time to leave a review on iTunes. It really does help keep things moving here and gets the word out. Go to meaningfulmoney.tv/iTunes to leave me a review if you haven’t already -thanks in advance!

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This podcast is brought to you with the help of Seven Investment Management, a firm of investment managers based in London. They put their name to my show and to my site and videos because they believe in what I’m doing, and I’m very grateful for their support. You can see what they’re up to at 7im.co.uk

News

US Debt Ceiling – As a brief aside before we dive in, I came across a video on YouTube the other day. When we talk about deficits and debt ceilings, there are so many zeros on the numbers that they become meaningless. But when you actually visualise the sums of money involved it is scary stuff.

The video shows the size of a $100 bill, then a wad of $10,000. Then $1 million and works its way all the way up to the  size of the US total debt which is $16.69 Trillion. I really puts things in context I can tell you.

Check out the video and let me know what you think. The day this session is released is also the deadline for extending the US debt ceiling. I usually write and record these a day or so before so I don’t know if they have sorted it at this stage. But I’m sure they will. *Fingers crossed*

WillAid – This is an initiative to encourage people to make wills. Instead of paying a fee to a solicitor, you make a donation to charity. The suggested donation is £90 for a single will and £135 for a pair of basic mirror wills. This strikes me as a great idea to get something really important done and make a difference in the world too. You can find out more at willaid.org.uk and find out why you should make a will back in Session 25.

Widows Awards – Last Friday I won the Scottish Widows Award for Industry Initiative for MeaningfulMoney. This was a great honour because, unlike many awards, this wasn’t something you put yourself forward for. Instead it is voted for by independent judges who are leading lights in my profession. The awards dinner was very pucker and the hotel was something else. I now have a foot-high bronze of the Scottish Widow gracing my office. I met the real one on Friday night – she’s very tall and very attractive!

Introduction

Money is not a passive force. It isn’t inert (Does that make it ‘ert’?!) It has power to build and to destroy. It can enable all manner of things for you and also, if you handle it wrong, can disable you from being able to do what you want in life.

When people get in touch with me to work with me as their financial planner, they usually have something that they want to do which they need advice on how to go about doing. So maybe they want to give some money to their kids and are wondering about the inheritance tax implications. Or maybe they are considering long term care, or a first time mortgage. Usually they want to DO something. My job as part of my initial conversations with them is to encourage them to look more widely at their financial picture and not be too blinkered on just one aspect.

Quite often As part of this conversation, I remind them of the three uses of money. These, in my opinion at least, are the ONLY three valid uses of money. What are they? Let’s find out:

Everything you need to KNOW

1 – Money is for spending on having fun

Thought I’d get the most fun one in first! Anyone who has opened the box on a new Apple product like an iMac or iPad knows the visceral pleasure you get from the perfect packaging and the little Apple stickers. Just me then? OK

Or maybe, you plan a shopping trip with friends. (I realise that I’m speaking to the ladies primarily here) The planning, the hotel, the spending, the lunching, the bags, the coffee, the more bags, the spending, the even more bags and collapsing at the end of the day surrounded by lovely new things. These are good feelings, as long as they’re not fuelled by debt.

A new car, a new house, a great holiday. What great uses of money these things are. They can make us happy, and there is nothing wrong with spending money. For some of my older clients, brought up to save and be prudent, it can sometimes be hard for them to spend money as they should. But they have worked hard and saved all their lives to own their home and have some money behind them – what is the point of dying with that money still in place?

So I spend at least half my time encouraging my clients to spend what they have worked so hard to build up. Not willy-nilly of course, and not recklessly. They don’t, after all, want to run out of money and suddenly find themselves dependent on the state, but many people spend too little and keep on sacrificing way past the time when they need to.

A common objection I get, particularly from older people, is that they don’t want to spend their kids’ inheritance. There’s a whole can of emotional worms dying to be let out here, but it is possible to enjoy what you have built up as well as benefit your kids when you have gone. It just takes a bit of thinking about and planning. Personally I plan to look after myself first – what about you?

So the first use of money is for spending on having fun, whatever your definition of fun is.

2 – Money is for investing towards a given end

The last few words are important there. If you’re going to invest, you need to have some kind of target to aim at. Now when they teach us advisers what we need to know for our exams, all the exam questions feature people who know exactly what they want to achieve by when. Real life is rarely like that. The purposes for which you are investing can be as vague or as refined as you like.

It is perfectly legitimate, for example, when you are first starting out saving and investing that your aim is to ‘have some money behind you’. It is better to put numbers on it though. So rather than just wanting to have a financial cushion, you could say: ‘I want to have a £10,000 emergency fund and £25,000 invested five years from now. When you’re starting out, you can’t know about how much income you want to retire on or even when you might want to retire.

As you go along, your mind will begin focusing on certain milestones, particularly when kids come along. So you might plan for your son’s university years, or your daughter’s wedding or your own retirement.

Then in your later years, you might plan for your own care, your grandchildren’s university or wedding costs, or what you want to happen to your estate when you have gone.

The point is that life comes first when investing, rather than the other way around. I’ve said this before, but if a prospective client walks in my office without any thought for the future and just wants me to make them as much money as possible, I won’t work with them. These kinds of people are never satisfied, always looking for what they could have got if they invested there instead of here, always grasping, obsessing over and counting their money and losing sleep when the market turns against them.

How much better to be working towards a given end, have a plan for achieving it, and then monitoring things as you go along. Focusing long-term means that short term market jitters are far less relevant and stressful.

Investing, then, is a perfectly good use for money, as long as it is aiming at something…

3 – Money is (really) good for giving away

When I talked before about spending money, I said it can make us happy. That’s true but only to a point. Assuming you’re very rich, there are only so many cars you can buy, holidays you can take and so on. Happiness from spending money on ourselves is short-lived.

Seeing other people enjoy our money is incredibly deeply rewarding though. Most often this will be our kids. Watching their eyes light up when they are given something they weren’t expecting. Or enabling our grown up children to move house, or buy a car. My clients have repeatedly told me that the biggest pleasure they get is being able to help their children and to watch them getting enjoyment and use out of the money.

Giving to charity can also be a powerful motivator, particularly if that charity is close to our hearts for some reason. At the recent IFP Conference I went to, the chosen charity for the gala dinner was the Stroke Association. This was pertinent because the CEO of the IFP had a stroke earlier this year, so you can imagine that the delegates dug deep for this particular cause.

This is my favourite of the three uses of money. I don’t know about you, but I want to get to a position so that not only are my own current and future needs met, I am in a position to give money away and enjoy the pleasure of doing so.

Last week I recommended some resources for furthering your financial education. One of them was a book called the Total Money Makeover by Dave Ramsey. (Affiliate Link) Towards the end of that book, he talks of the joy of giving and tells some great stories of people who have worked hard and saved all their lives and are now making a difference in other people’s lives. These stories are inspiring and are worth the price of the book alone.

The three (the ONLY three) uses of money then are:

#1 – Spending on having fun

#2 – Investing towards a given end

#3 – Giving away to others

I wonder if you agree with me on this. I’d love to know if you don’t. I’ve never claimed to be right all the time, and if you think there are other uses then do get in touch via the feedback page.

So that’s the thesis of this session, and in a way it’s pretty high-level and doesn’t sound particularly actionable. but you know me better than that!

Everything you need to DO 

1 – Spend – do a cashflow

Spending is great, as I’ve said, but reckless spending leads to misery and no-one wants that. Spending thoughtfully is the way to do it, not on impulse. Most of us are not wealthy enough to buy whatever we want whenever we want with no thought.

I’ve said a hundred times on this show that income and outgoings are the root of all financial planning. So if you want to be able to spend money in the knowledge that you’re not going to derail your future plans by doing so, you’re going to need to do some kind of cashflow.

At its most basic level, this means working out whether you have enough money this month, after paying yourself first, paying down debt etc to go out for that meal you fancy. Much better to do that than to blow £75 on the meal, and then realise you probably shouldn’t have. (Some of you are thinking £75? – that’s some meal. Those in London are thinking £75? – am I eating alone?)

At a higher level, it might be that you have to sit down and project things forward a bit. If you buy the new car now rather than wait a couple of years, what impact will that have on your other plans? If you give your kids some money now, will that come back to bite your estate for inheritance tax if you die too soon, or on your long term care planning?

I guess I’m suggesting that you spend intelligently. Intentionally. It might not feel as fun, but it eliminates buyer’s remorse, I can tell ya.

2 – Invest with a plan

I mentioned a brief example earlier about putting some numbers on your financial goals. First you’ve gotta have some goals, so spend some time thinking about that. Do it together if you’re in a relationship. Don’t limit yourself financially. We can reality check later if necessary, but within reason, let your thoughts and dreams fly.

You may need some help to do this, but try to be specific. We’ve all heard about so-called SMART goals, that they should be Specific, Measurable, Achievable, Realistic and Time-bound. At least I think that’s what they stand for. There’s some fluff there though. The two letters that matter are M and T. Goals should be measurable, so you know when you have got there. And they should be time-bound, so you have a deadline to work to. The rest should be a given.

Maybe your goal is to pay off the mortgage on your house sooner rather than later. So the goal would be to reduce the mortgage balance to zero ten years early, say.

A competent financial planner can help you here of course. When you have a target and a timescale, you can invest accordingly, taking the minimum amount of risk necessary to achieve that target. I prefer to invest using risk and timescale as the primary drivers of asset allocation, that is, how much do you invest where? Consider de-risking the investments the nearer you get to your target. We call this lifestyling. And if you hit target early, don’t be greedy. Bank the money then move on to the next target.

Don’t just invest to make more money. Invest to make more money so that you can…fill in the blank. It’ll focus the mind on what you have to do in terms of regular savings, and will stop you from making daft decisions when markets are rocky.

3 – Give. Intentionally.

Giving money away is a great feeling, but it is potentially fraught with implications. If you give money away and still enjoy some benefit from it, you could have problems later on. Say your kids want to buy a place in Spain. You give them £100,000 towards it, and then you spend six months of the year living there. That’s not gonna work for all kinds of reasons.

Or say you make a gift of money to your children, and then four months later you need to go into long term care and you can no longer afford to pay for it yourself – because you’ve given money away – the local authority can unwind the transaction.

This latter one is, I think the worst possible scenario. You give money away and then can no longer afford the basics of living. ‘Surely no-one would do that’ I hear you cry! Well things can happen. If we’re talking thousands rather than tens or hundreds of thousands, then this isn’t beyond the bounds of possibility.

I think it’s important then to be intentional with your giving. Again, plan it in around everything else. Giving is in itself a great reason to invest. Invest money so that one day you’ll be able to give freely. That’s a noble calling right there.

If you make large gifts which might have an inheritance tax implication, consider insuring the liability on that gift with life insurance. There are special plans called Gift Inter-vivos policies which last seven years and are designed especially for this purpose.

You could also consider the use of trusts when giving money away. It can sometimes – often – make things more easily manageable than giving money outright, and allow you to retain an element of control. I covered trusts in some detail in Session 22, so give that a listen, but remember this is a specialist area. I reckon the majority of advisers don’t know enough about trusts, so be wary and make sure your adviser knows his or her stuff. A solicitor can be helpful here too.

Obviously I’m not talking about giving your granddaughter £10 toward a shopping trip here. I’m talking about significant giving which will make a real difference to the recipient. That kind of giving should be done carefully and intentionally with a mind to your own future and building in various scenarios. Take it carefully and get help.

Listener Question

Andy from Leeds left a question asking me to explain what a Gift & Loan trust is.

A Gift & Loan trust is an inheritance tax planning scheme involving a trust. Firstly, you can forget the ‘Gift' part of the scheme. It used to be that trusts had to be set up with a gift of some kind so often a nominal gift of )say) £10 was made to set up the trust.

Then a loan is made to the trust, let's say £100,000 for easy figures. This is invested by the trust. The settlor of the trust requires his loan to be paid back over time. So let's say that he requires the loan to be paid back at £5,000 per year over 20 years. Usually, the trust is not charged interest, by the way.

Let's say that at the end of year one, the trust investments have had a good year and made £10,000. Well the value of the money in the trust will now be £100,000, less the £5,000 repayment, plus the £10,000 gain, so £105,000. Te trust still owes the settlor £95,000, but the £10,000 gain belongs to the trust.

Over time the settlor is fully repaid, but any gains made on the money stay within the trust, and that is really the point. It allows any growth on the money to stay outside the settlor's estate, but enables the settlor to retain access to the money should they need it in future. It takes time to work as investments need time to grow, so this isn't an Inheritance Tax strategy you would use in your late 70s or 80s. But it does have a place if you have some money that you want to retain access to, but that you are happy to forego the growth on that money in the future

Outro

OK then, we’ve covered the three uses of money and I hope it was helpful. Do you have any questions? If so, please leave them in the comments section below

If you like what you hear on this podcast, please leave a rating or review on iTunes by going to meaningfulmoney.tv/iTunes. This helps others to hear about the show and to subscribe, because it keeps me near the top of the rankings.

I hope you enjoyed this session. Next time we'll be talking about Equity Release. If you have any questions about this, go to meaningfulmoney.tv/feedback and leave a voicemail

Thanks for listening – I'll talk to you next time