Know your number

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If you won the lottery would you hand in your notice the next day?

It’s a question that’s commonly asked.

However, the real question is what is your number? Imagine a financial world with no mortgage, no children on the payroll, how much would you need to live on if you stopped work?

We would want to know from you what amount do you need to have to come in and then add on your discretionary spend (such as holidays and interests).

Remember too, we work on net income, not gross.

Ways to do this?

Fun Account. Bills Account.

We recommend this approach for clients who that want to understand their monthly budget and to separate the paying of bills from and the paying for fun items.

The salary is paid into the fun account. The total of all of your bills (including any monthly saving and or investing that you do, treat it like a bill!) is then sent to your bills account by way of a standing order. So all the bills get paid and fun can be had.

Another idea is to calculate what you have spent over a three month period (February, March and April for example, spending in December can include one offs and January may cater for any Christmas overspends).

What’s in the Box?

When it comes to planning for how you take your income at this stage, you should consider the four (six?) boxes:

table2

So in addition to your personal allowance, in theory you could withdraw £28,800 (how do you get to this number?) as an individual tax free from your savings and an investment account in addition to making tax free withdrawals from your ISAs.

With regard to pensions you should fill this investment first to benefit from the tax relief and spend it last as it does not fall inside your estate for Inheritance Tax purposes.

You should also use your Premium Bonds Allowance which is up to £50,000 per person.

Therefore, based on this overview you should be trying to maximise your ISA allowances each tax year (by a way of having access to tax free cash) and adding to your pension to benefit from valuable tax relief.

Projections

For pensions, the Lifetime Allowance figure is a useful asset target.

Another way is making an assumption on a growth rate and taking a view over a period of time of what that would groew too to then check if you are on or off track.

Summary

The above is intended to provide food for thought with respect to initiating a thought process in relation to implementing a financial plan that utilises available tax breaks and allowances in the most efficient way possible.

This should start with ‘knowing your number’ which can then be the framework to build your financial plan around.

Don’t leave it too late to plan!

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