Financial planning case study for a young family – Independent Financial Advice Coleraine

Financial Planning, News

I was asked on Friday by a trade magazine to expand on one of the case studies from our website.  I’ve edited it for this blog post (Real names have been changed).

Rob and Catriona are typical of many young couples I meet, enjoyig a high standard of living and little to no planning for the future.  As financial planners we can make a huge difference to a family’s financial well-being and the sooner we get involved the better.  Convincing a young couple that they need financial planning is another matter entirely!  However, this couple approached me knowing that they needed to do some sort of planning but they weren’t sure what that would involve.  Rob runs his own business and Catriona works part time as an administrative assistant in a local business.  They have one young son.  I soon discovered I had a clean slate to work from as they literally had no financial policies or investments in place.

At the outset our conversation we focused on what was important to them and as we talked it became clear that maintaining their standard of living no matter what happened was their main priority.  They had a dream to buy and renovate a property in the Dordogne region of France sometime within the next five to ten years.  They wanted to be able to fund Matthew’s way through university should he go down that path so as to prevent him graduating with a heavy debt burden.  Neither of them had thought about retirement but reckoned that they would like to be able to stop working when Rob turned 60.  I explained the concept of a cash flow model to them and that to commence work on their own plan I’d need them to review their expenditure very carefully.  This is probably the least appealing part of the process when it is being explained but usually clients quickly grasp its importance and find it very illuminating, if not downright uncomfortable!*  They disappeared clutching our firm’s expenditure questionnaire which we have worked on to make it more thought provoking and less daunting. 

When advising a young family I always find that there’s a large protection gap should the worst happen.  Rob and Catriona were no different so I created some model scenarios which highlighted what would happen should either of them die.  Given that Rob is the main household earner I demonstrated the effect of the loss of his income on the family’s future finances.  Obviously, a death or serious illness is a horrendous event for any family but the financial consequences are often overlooked and can be devastating.  Catriona works part time so that she can spend time with Matthew at home and this was identified at an early stage as being very important to both her and Rob.  It was crucial that Catriona would not have to work full time as a result of Rob’s death or inability to work because of a serious illness or accident. 

Having spent a number of summers in the south of France they had a good idea of how much they’d need to spend to buy a property to renovate.  They were happy to buy something that needed a lot of work and would be in no rush to complete the renovation.  They would not need to accumulate a very substantial sum to buy the sort of property they were interested in and I was able to include this in their future cash flow planning with a five year time horizon for the initial purchase. 

Rob was a sole trader which made things easy from an administrative point of view when he started his business but I pointed out to them that from a tax planning point of view he should consider forming a limited company.  My own experience of moving from sole trader to limited company a few years ago helped them see the benefits of this.  I also suggested that Catriona should at least consider working for the new company as this would open up valuable tax planning opportunities for them both.  I advised them to speak with their accountant about this and that I’d be happy to attend any meetings if they so desired.  However, given that this was unlikely to progress very quickly we decided not to postpone retirement planning but to implement a strategy now and review it if they decided to form a limited company. 

It’s always a pleasure to see both halves of a couple engaging with their financial planning and I try and encourage both parties to attend all meetings.  In most households there’s usually one person who “handles the finances” and I believe that it’s healthier if both parties understand where they’re headed and what their strategy is.  Both Rob and Catriona quickly grasped the different cash flow scenarios and their implications. 

Interestingly, Rob’s goal of retiring at 60 conflicted with funding for Matthew’s potential university costs.  This led to a discussion during which they decided that the retirement goal was most important and they would fund what they could afford to set aside for Matthew’s university costs at this stage.  However they made it clear that they would be keen to monitor this and increase contributions if that became possible down the line. 

Since neither of them had invested money before I explained our investment approach to them and discussed the concept of a risk profile.  Given that these two clients are in their early thirties the cash flow scenarios altered dramatically depending on investment growth rates used.  We agreed on an investment strategy that would suit them and provide a realistic chance of achieving their financial goals. 

With such a young couple I try and keep my advice as simple and flexible as possible to allow for the changes to their circumstances which will undoubtedly occur.  To meet their life assurance shortfalls I set each of them up with a term life assurance policy written under discretionary trust.  This provided enough of a lump sum in the event of either death to enable each of them to maintain their chosen lifestyle without financial pressure.  As we discussed this I asked them to have wills drafted as a matter of urgency and to discuss Power of Attorney with their solicitor.  Having such a young child brings to light a hugely important issue which many people overlook and that is who do you want to look after your child if both parents die.  I shared with them that there would be certain members of our family who we’d prefer to be responsible for Daisy’s upbringing and others that we would not!  It can be a complicated issue and can give rise to some “animated discussion” which I encourage to take place away from my office! 

Protecting their incomes was really important and we agreed an amount that the couple needed to set aside as their contingency fund and then set each of them up with an income protection policy which would replace as much of the potential lost income as possible.  We looked at critical illness cover but at this stage they decided on the basis of cost they’d just set up a life assurance and income protection solution at this time.

We set up a pension for Rob and I advised Catriona to join her employer’s pension scheme as they would match her contributions up to a certain level.  Again, I kept things as simple as possible to allow for changes in the future.  Pension planning would be different if they decided to form a limited company with Catriona as an employee and/ or director. 

Neither of them were using any of their ISA allowances and I recommended that they use these to fund both the potential property purchase in France and Matthew’s university costs. 

Both Rob and Catriona realised the potential gravity of their situation and were very keen to proceed with my recommendations.  Affordability was an issue and that led to prioritising their protection needs and implementing solutions to what we agreed were their most pressing needs.  I tell potential clients that my job is to give them peace of mind th
at their financial future is secure and I’m pleased to say that Rob and Catriona feel that they now have that peace of mind.  This couple’s financial planning needs were simple and straightforward the recommendations implemented reflect that.  I’ve no doubt that they will become more complex as time passes and the annual review meetings will be critical to the ongoing success of their financial planning.  The majority of my clients are in or at retirement and while younger couples don’t have the assets to make them the most profitable of clients initially they will be the affluent clients of tomorrow.  It’s certainly more challenging to get younger clients to engage with planning and to change potentially damaging spending patterns. 

* Our online investment platform allows us to offer clients online banking integration which allows clients to add their online banking details to their client site which in turn allows them to view all their accounts with just the one login.  The system is smart enough to identify spending patterns and allocate them under headings such as Utilities, Clothing, Entertainment etc.  This produces a pie chart so clients can see where their money is going each month.  This keeps their spending patterns in mind throughout the year and not just at our annual review meetings.


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By David Gibson



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