Financial Planning Is A Matter For The Head And Not The Heart

Your emotions can seriously hamper your wealth, warns Tim Walker Head of Office and Divisonal Director at Brewin Dolphin in Exeter, who says he sees many clients allowing their heart to rule their head, to their financial detriment.

 

Tim Walker Head of Office and Divisonal Director at Brewin Dolphin in Exeter

“It can be difficult to look at your personal financial circumstances from a purely objective standpoint,” he said. “Emotional attachment to certain assets, fear of upsetting friends and family and even superstition mean that people do not fulfill their financial goals even if the desire is there. It may help to engage a professional adviser who can not only advise you from a legal or tax perspective, but can also ask you testing questions you might not confront otherwise.”

Here are the most common emotional mistakes he sees people make with their money, and how to mitigate them.

Misplaced loyalty
Investors hold onto too many shares or assets in the company they work for, putting many of their eggs in the same basket. Similarly, entrepreneurs who sell their company often retain a large stake because of their emotional attachment to the business. Remember to diversify your assets to spread risk.

Hiding from reality

Many people are guilty of procrastination, especially if they are worried about their financial situation. While it is best to start saving for a pension as early as you can, it’s never too late. Claiming “it’s not worth starting a pension at my age” is not a good enough excuse not to save for your future, particularly given the tax reliefs which come with pension contributions.

Avoiding uncomfortable issues

While many people find it uncomfortable talking about succession planning, to avoid making a will on the grounds of superstition or because it is a bad omen is irrational. It may help to undertake this process with a professional adviser.

Not letting go

It is very easy to hold onto an investment – whether ‘cherished’ inherited assets or a large family home after your children have long fled the nest – for emotional reasons. If you want to pass these assets onto your family, it may make sense to sell up and release cash to facilitate IHT gifting.

Panicking about the future

Many people would like to pass their wealth onto their children, but fear giving away assets in case they can’t afford their living expenses – when clearly they will still have more than enough to live on. Mapping out your inflows and outflows with an adviser, and planning for future expenditures or liabilities, will help you work out exactly how much you need to keep and how much you can give away.

Not fully trusting your spouse with your assets

Some clients fail to make full use of their spouse or partners tax allowances, which is one of the most common mistakes. Often the main earner pays 40% or even 45% tax on their investments when their spouse is a basic or even non-taxpayer. If the assets were transferred to the lower earner, the couple would benefit by using both tax allowances to the full. Trust, it seems, is a valuable commodity!