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Most of us have heard the phrase that ‘a chain is only as strong as its weakest link’ at some point, but when it comes to your finances, it is more correct than you might imagine.
When you think about your own financial affairs, you will generally be looking at one aspect of them at a time. For example, you might have suddenly realised at 45 that you have not saved enough for your pension – so you start to think about your pension.
Or maybe you have just had children, so you start to think about what would happen to them if you were to die without some life insurance, and you go to find out about that.
You might even have a burning desire to own the home of your dreams, so thinking about a mortgage to allow you to get there is a priority.
All of this is understandable. Finance is sometimes complicated, so taking it in bite size chunks to help you understand what you need might be a good way of tackling things. Or so you might think.
But what about the credit card debts you have, or the regular savings plan that you have forgotten about setting up?
The reality of your financial affairs can be very different from the perspective you have. For example, you think you have not put enough away into a pension for your retirement – well, you might be right. But have you got other savings that you might have squirreled away for a rainy day that could do the job just as effectively?
Or have you invested in property because it is something you have trusted more than investment funds, and not really thought about how you might be able to use this to build a retirement income?
Let’s think about the mortgage and life insurance too – some products that you could buy to protect your mortgage if you should have a critical illness or die before it is paid off may already have the life cover that you think you need to get from elsewhere. Actually, if that is the case, you would be wasting your money on new premiums that you don’t need to pay.
The thing is, our financial affairs – even when they appear to be relatively simple – can have so many convolutions that taking one area in isolation can have an unintended consequence on another. Although it may seem more complicated, actually looking at your financial affairs as a whole is a much more effective way of dealing with the individual area you may be specifically thinking about, and ensuring you are not creating an undesirable knock-on effect on something else.
Consider it to be like thinking of the overall health of your body. You would not necessarily think to eat lots of vitamin C simply because it is good for the health of your skin, and then not think about the other vitamins that you might need to keep the rest of you healthy. It is a similar strategy with finance. You need to nourish all of your financial needs, not just one particular one, as this will create an imbalance that is potentially going to send something else off track.
The thing is, looking at everything together – especially if you are not experienced in financial matters – is very tricky. Like spinning plates – it is very much a balancing act, and by concentrating too closely on one thing, you can find that others start to wobble and fall before you have a chance to go back and recover them.
This is where a good financial adviser can help. By knowing what impact one aspect of your finances will have on another through experience, the adviser can direct you in the best way possible to ensure you get the right options at the right time. You can also rely on a good adviser to keep you updated on how your finances are progressing, and rather than you thinking about all of the areas you need to individually, you would simply go to your adviser once a year – or more if you prefer – to get a once over of your finances.
It is effectively a financial MOT that you go through to make sure that everything is working the right way, and there are no areas that could do with work that are being ignored. Remember that weakest link in the chain? Well, when you exert extra leverage on weaker parts because you have repaired others so they are working properly, there is an even greater chance that the link will snap.
You don’t want to be in this position financially, everything should be running smoothly for you, and that is the beauty of holistic financial planning. Everything is considered, so nothing is left to chance.
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