So far, I haven’t said much about property, so let’s rectify that now. My good friend Andy Hart is the master of the pithy truism and he says that the way to build wealth is with businesses and bricks. So that’s investing in shares, or by owning your own business, and by owning property.
Property is a great asset class, but it isn’t the panacea that many people think it is. Its positives are that it is tangible – you can walk up to an investment property you own and touch it. It’s harder to do that with lines of shareholdings on a computer screen.
It feels more real as a result, and that tangibility tends to engender feelings of its value having some kind of permanence. That’s not true of course. The council could build a flyover nearby or squatters could move in next door and set fire to the place.
Also, property is to very tax-efficient any more. The government have systematically removed most of the tax breaks they have given private landlords in the past. And then there’s the hassle factor. You’ll have tenants paying you rent, they might stop doing so and you’ll have to do something about it.
You’ll need to maintain the fabric of the building and probably refurbish to some extent whenever you get a change in tenant. You’re also liable for that building and there all kinds of standard you have to adhere to and if you fail in that regard, you’re on the hook. And finally, property is illiquid. That means it’s difficult to convert quickly into cash should you need it.
All that said, property does generally go up in value over time, but it usually needs to be over a long time – so it is a good investment, for sure, you just need to go in with your eyes open, which is true of everything.
When I say to keep property physical, it is possible to invest in property through a fund, just like you can invest in shares and bonds through a fund. While this is not a bad idea, per se, I would keep any such investment to a small proportion of your whole invested amount, less than 10% generally.
This is because property funds have some unique, erm, properties, which means that sometimes you can be precluded from getting your money out in a hurry. My good friends Rob Bence and Rob Dix are the geniuses behind the Property Hub. There is more information about property investing on there than you can possibly shake a stick at.
Review Annually
While you’re thinking of ways to invest, I’ll take the opportunity to remind you about reviewing. It’s a good idea to review your personal finances regularly. When it comes to investments and pensions and all that stuff, you should do this no more than annually, I’d say.
A lot can happen in a year, and it’s good to take stock of your current circumstances at the time of the review, to see if your current setup is still ideally suited. Let’s work through an example.
A year ago, you were working for someone else and you had a company pension there. You were saving into an ISA too – great job. Since then you’ve got engaged and your partner is pregnant. That changes things somewhat!
Oh, and you’re now working freelance but have some great clients and you’re earning 50% more than you were a year ago. You now need to take stock and consider a few things:
Firstly, do you have enough life insurance, given that you’re going to be responsible for a child soon? The podcast episode “The Ultimate Guide to Wealth Protection” will help, or there’s a blog series to accompany it, too.
Next, your household income is likely going to dip if your partner goes on maternity leave. What might that mean for your savings? Counterpoint to that is the fact that you’re earning more – how do you balance these things out?
Also, you had an employer’s pension before – what happened to it when you left? Probably it’s just frozen there – what should you do with it? Should you open up a pension yourself and start contributing – answer: yes, definitely.
You’ll need to contribute more as there’s no boss paying in for you. And you should definitely look to see if it’s worth you shifting your old pension into your new one, to keep things tidy.
And maybe, with the baby coming along, you might want to move out to a garden office, or even move house so you have an office to work from. Will you or your partner change your work pattern long-term, or will you both work full-time, in which case, you may need to consider childcare.
See what I mean. Life changes, and your finances need to change with it. It’s all-too-easy to drift and let life pass you by, keeping your finances as something you’ll get round to before long.
Don’t do this. Set a date in your diary for a review, and be prepared to review things ad hoc if life takes a really weird turn like you lose your job or get a diagnosis that’s going to mean long-term changes.
At the same time, you should check the makeup of your investment funds. Have your timescales changed? Well, you’re a year further down the line, so that might make a difference. If you hold more than one fund, you might want to adjust the split between them back to how you want it as often they will get out of kilter.
This process is called rebalancing. Be intentional – no-one is going to do this for you. If you really feel like you don’t have the time or inclination to do it, pay a financial adviser to do it for you.
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