“Money is 80% behaviour, 20% head knowledge. It’s what you do, not what you know.” That’s according to Dave Ramsey, America’s money expert, but – and it is a big but – without that 20% knowledge, many doctors and dentists could fall into any one of these painful financial traps.
Your life is at full capacity…you’re operating on all cylinders at work, at home, trying to do everything, see and please everyone and no doubt dropping a few balls in the process…watch out!
Trap 1. You have no real idea where your money goes or even what some of your direct debits are for
This can result in you:
- Spending more than you earn
- Losing track of your non-essential expenditure, and/or
- Worrying unnecessarily because you’re never quite sure if you’re financially OK or not.
Set up a spreadsheet, make a simple list in a notebook, or use one of the many mobile apps available to record your regular costs on a month-by-month basis. Against each, put the date the money leaves the bank then, for each month, add any additional spending. Include a sum for cash spending on ‘extras’ and treats so that you don’t feel guilty or overspend on your budget.
With this knowledge, you’ll be able to track the use of your net income and know whether or not you do indeed need to worry about your financial situation! Knowledge is power.
Trap 2. You’re about to buy a house you can’t afford
House hunting can be a battle between emotion and sense. The house you have always admired comes onto the market but it’s more than you wanted to spend. You’re desperate to get into the catchment of a great school, but houses in those areas come with a hefty price tag.
Don’t make the all-too-common mistake of buying a house with repayments that don’t allow you the freedom to provide for other important life events, such as holidays or being able to retire!
Have a clear budget before you start your house hunting search and stick to it. Ideally, ask your financial adviser to find the best mortgage for you so that you know how much you can borrow and how much you can afford to repay back.
Your financial adviser can also gain a ‘Decision in Principle’ which, subject to the property you choose being acceptable, gives you the exact amount of money your chosen lender is happy to lend you based on your income, deposit, etc.
Make sure that your adviser is fully independent and searches the whole mortgage market. If they don’t, you could miss out on a mortgage that’s just perfect for you!
Trap 3. You rely on credit cards for emergencies and don’t pay them off in full each month
A lot of people sensibly keep a sum of cash aside to cover emergencies and unforeseen costs. Others, on the other hand, rely on credit cards for such events.
If you can’t pay off the full balance before the end of each month, the credit card route is an expensive one. Easy credit can also quickly dry up and leave you with a debt that has a high interest rate attached to it, making the outstanding sum grow instead of fall!
Just paying the minimum amount each month is a fatal plan too. With interest rates of 22.8%¹ not uncommon, this tactic rarely keeps the outstanding balance level.
Trap 4. You don’t have a financial plan
Living day by day or even year by year may feel liberating but, without looking to the future, you may be unable to financially deal with what’s thrown at you.
Putting timelines to big expenses such as school fees and house moves will give you a clear sense of how much you need and when. You can then more easily plan how you’re going to fund or save for these life events and enjoy life today!
Trap 5. You forget about your protection portfolio
Let’s face it, reviewing or even creating a protection portfolio isn’t anywhere near as exciting as creating an investment portfolio. It necessitates the depressing process of thinking of all the worse case scenarios in life! Yet failing to look at your protection needs, addressing them and regularly reviewing them can result in massive financial hardship for you and your family.
How will your mortgage, practice loans and those school fees be paid should you die or be unable to practice? What would you and your family live on if you couldn’t return to work? Ensuring your big liabilities are covered could make the difference between suffering financial hardship or not.
Trap 6. You ignore even just one of the short, medium and long term savings trio
Short term savings focus on areas such as cash flow, living costs, holidays and cars. Medium term savings cover house moves and school and university fees, to name the most common two. Long term savings traditionally means retirement planning.
Neglecting any of these timescales can have a knock-on effect on not only how you live your life, but what you can and can’t do in it. If you don’t have the reserves for your medium term goals, you’ll either prevent them from happening or make them so heinously expensive they’ll have a detrimental effect on your other plans.
Without long term planning you face such a large income drop in retirement, there’s unlikely to be much to look forward to. Over prioritise the medium and long term and you’ll be too tight financially to achieve and enjoy your here and now goals. Each timescale needs due care and attention.
Trap 7. You leave pension planning until ‘later’
Consider your pension like a bath. Traditionally you could either turn the taps on a little, dripping money in over a long period, or wait until the house was bought and the children taken care of before you filled it with huge sums of money. Both routes would have given you a good pension. Not anymore!
There are now limits to allowable contributions each year which means leaving pension planning until ‘later’ is no longer an option. Until the 6th April 2018, your annual allowable contribution limit is £40,000. That’s if you’re a medic with an income of less than £110,000.
If you’re a higher earning medic with a taxable income (less pension contributions) of more than £110,000, you could find that your allowable contribution limit is reduced to as low as £10,000 a year. NHS Medics: Calculating your annual pension allowance >
Whilst £40,000 may sound quite a lot, it includes both the physical sums you pay into your private pension arrangements and the amount your NHS Pension benefits are deemed to have increased by during that year. Exceeding the annual allowance will result in a tax charge at your highest tax rate.
Trap 8. You buy your house insurance from your mortgage provider
You don’t have to! Nor should you just renew your house or car insurance with last year’s provider without taking 30 minutes to check out what you could save on one of the many comparison sites. It really could save you money.
Trap 9. You leave tax breaks unused
You can also contribute to a Junior ISA without it affecting your own annual ISA allowance. A Junior ISA allows anyone under the age of 18 who was born before the 1st September 2002 or after the 3rd January 2011 to have £4,128 (2017/18) invested on their behalf, tax free. This figure can be split between cash or stocks and shares.
Pension contributions attract tax relief too, at your prevailing tax rate. All these tax breaks fall under the ‘use it or lose it’ rule!
Trap 10. You dismiss recent pension changes as irrelevant to you
It is unlikely that recent pension legislation and/or NHS Pension Scheme changes have not affected you. Thinking otherwise could be a costly error and one that can be easily avoided by speaking to a specialist medical financial adviser.
Go on, be honest, how many of these common financial traps have you fallen into? Let us know by adding a comment below.