Hello and welcome to the money plan – a masterclass on how to get better with money.
Hello, my name is Warren Shute. I’m a certified financial planner and author of ‘The money plan’.
I want to share with you some of the principles I’ve used with my clients over the last 25 years to become better financially well organised.
But before I begin, I’ve learnt in life that you have a far better outcome with the masterclass if you know what your outcome is, what your purpose behind watching is.
So I want you to write down for a minute just some of the things you’d like to achieve from this masterclass to make it worth your time.
And I believe this is true in life for most things. Have a clear idea in your mind what it is you would like to achieve.
In this masterclass, I’m going to guide you through the first few steps of the money plan and what I take my own clients through at my financial planning practice. I’ll help you to get clarity on what your outcome is, I’ll help you to become better financially well organised and what the financial foundations are that you should consider.
So let’s begin.
Step one: what’s your outcome? Ask yourself a powerful question – how do you want to live the rest of your life?
Take a few moments to write a few things down that you’d like to achieve across the course of your life – what you’re aiming towards.
Now where you are today and where you ultimately want to be may be poles apart – and often quite disheartening.
However as individuals we tend to overestimate what we can achieve in a year but underestimate what we can achieve in a decade.
So to bridge that gap, we tend to have five- and 10-year visionary outcomes – things that will guide us towards those targets that we’re looking for.
So this might be, for example, in five years’ time, I’d like to have my mortgage repaid. In 10 years’ time, I’d like to be retired from work. But to help us achieve those visionary outcomes, we then tend to have three and one-year more specific goals, more specific outcomes that we want to achieve. And we write action points down to achieve these to help us move us towards those one and three-year outcomes that will ultimately take us towards the five and 10-year outcomes.
And when you’re setting these outcomes, I want them to be SMAC certified. Many of you have heard of SMART goals, these are SMAC certified. S. M. A. C.
S stands for specific. The more clarity you can give yourself on your outcome, the higher the chances you are of achieving it.
Measurable – how are you going to measure your progress and know that you’re making gains towards achieving it and you’re working in the right direction.
Is it achievable or is it so outlandish you’re setting yourself up for failure? We want to build confidence so make sure there’s a 50/50 chance of you actually achieving it.
And then compatible and I think this is the most important. Make sure they’re compatible with your values and the vision that you want to achieve in life.
Many people ask me how many outcomes or goals they should have and some feel the more, the merrier. I disagree. I want you to be more specific, particularly if you’re new to this. If you’ve never achieved goals before in the past or very rarely, set fewer goals – perhaps one – but set them in a broad, different area. So I have four areas that I look at achieving goals in:
First is personal goals. I like to set at least one personal goal for me to achieve.
The second is an economic goal. This will be a monetary goal. I like to set one economic goal.
Three – I like to set one adventure goal. So something that’s more fun. And I do appreciate it’s been hard in the recent past to do that. But something that’s a bit more fun, so a goal that has an outcome between it.
And then four, a contribution goal. So something to give back to other people.
Now how many of you have set an outcome or a new year resolution on January 1st, only to forget about it by Valentine’s day? It’s very common. So to help us stay on track, we set ourselves quarterly check-ins, or 90-day check-ins. So if you do this on January 1st, we’ll check in 90 days later.
The 90-day check ins help us make sure we’re on the right track, moving towards the outcome we want to achieve. But still 90 days is a long time. And we’re physical beings run by our emotions. Nobody’s giving us a user manual for this operating system.
So to help us stay on track on a daily basis, each morning or the night before, I write down three to five actions that I want to achieve for the next day that will help me move towards my 90-day check-in. I review the previous day's actions, so I look back and see ‘how was yesterday – was it good day or didn’t it go well? If it didn’t go well, why didn’t it go well? How can I improve on this?’
I then write down three to five things that I’m grateful for in life. You know, sometimes I think we can be so caught up in life we don't stop and appreciate ‘what are we truly grateful for?’. And I tend to journal. I journal sometimes one or two words, many times half a page. Just emptying my mind, allowing me to put pen to paper to clarify my thoughts.
So to summarise I want you to have a clear outcome in mind of what it is you want to achieve. If it's a financial goal, ‘The money plan’ is a great strategy to follow to achieve your financial goals. But learning is only halfway, you need to take action on what you’ve learnt. So take action from this masterclass.
And then check in. Sometimes we get off track and when we get off track, by having these regular check ins, every 90 days, you see where you are. And if it’s not working, you can realign. If you’re spending too much money in your WAM account, you can see that and you can realign, rather than leaving it until the end of the year.
Step two of ‘The money plan’ - how to get financially well organised.
Let me ask you a question, how many of you are good with your banking? Few people are and that's why I created the bank account system.
So with the bank account system, there are three main accounts.
The first is the emergency reserve. In your emergency reserve, we want to hold at least £1000 in emergency reserve. If you have unsecured debt, until that’s repaid, we then bump that up to six months of your expenditure.
We then have the bills account. It's from your bills account that we automate as much of your spending as possible to take routine thought out of everyday actions.
And what we do is we look at each of those payments and we ask ourselves: Do we need this? Do we want this? And can I get a similar experience for less because I want to compress the spending here without ruining your lifestyle.
Now, one of those payments from the bills account, each week on a Wednesday, is from yourself to yourself. So it goes from the bills account and gets paid to what we refer to as the WAM account. This is your walk about money. Now the WAM account is where you make all of your variable spending from, whether it’s fuel in the car to groceries to haircuts to coffee with friends.
Now we pay it weekly on a Wednesday because most of our spending occurs at the weekend. So if we pay it weekly on a Wednesday, we get paid and the money is ready for us to spend at the weekend. But if we spend all of the money by Sunday night, we then only have to wait Monday and Tuesday before we get paid again. So we’re trying to make sure that it fulfils your actions. Keeps you on the plan.
People often ask me ‘Well, how much should I spend in my bills account? How much should I spend in my WAM account?’. I’ve got a broad allocation of money. The 20, 50, 30 rule.
Roughly 20% of your money should be used to building up that £1000 emergency reserve. Once that’s there, use that 20% to overpay and early repay on your unsecured debt. Once they’ve gone, use that 20% to top up your emergency reserve to six months of your expenditure. And then once you’ve topped that up, use that 20% to fund your retirement plan and overpay on your mortgage. But please check with your mortgage provider that there are no early repayment charges that you will incur.
Then there’s 50% of your money. 50% of your income, thereabouts, should be used to be paid for your bills account. Cover all your regular direct debits and standing orders.
And then the final 30% of your income should be used for your WAM account.
Now these are a broad template. This will not fit everyone exactly. Some of you have more in the bills accounts. Some of you will need more in your WAM account. But as a template, they’re good for you to check in and see if you’re on track or widely off track. And it allows you to make adjustments accordingly.
Now, how many of you have children? Dependant children that is. I have two great kids, Ollie and Bella. But if I gave them everything they wanted, they’d be spoilt, and I’d be broke. So my wife and I developed the pocket money system. And this is where we allocate an amount of money, each month, for each year of their age. We pay £2 a month so Ollie’s 16 so he has £32 a month. He buys his wants, we buy his needs. So for example if he needs a new school uniform or if he needs new things for school, we obviously buy that. However if he wants a new computer game, he’ll buy that. And then we link their pocket money to chores around the house, so they realise that they have to earn this money and money is not just given to them.
Then we come to step three of ‘the money plan’ - strong foundations. Finances can be complicated, I appreciate that. So many years ago, I developed the house of wealth. It’s a simple image to help people understand where different things fit financially. And because good, strong houses are built on solid foundations, we have eight foundations for you to consider. Let’s kick off with the three that I think are very important.
The first is emergency cash. We aim to have at least £1000 but once the unsecured debt is repaid, ideally six months of your living expenses. I also think a will and trust are very important and something you should seriously consider. And the third very important foundation are LPAs. For anyone over 18, I think they’re very important and should be considered. There are two types: the first is health and welfare and the second is property and affairs.
Then there are five considerations – use this as a checklist if you like – for you to go through and ask yourself whether it’s relevant for you or not.
The first on the list is life insurance. We ask people to consider having sufficient life insurance to cover their unsecured debts. And if they have any secured debts, like a mortgage, but also loss of income going forward. The second one to consider is income protection. Having an insurance that pays out if you’re unable to work for a long-term through accident or sickness. The third is critical illness insurance – often pays out a lump sum of money on diagnosis of a critical illness. The fourth is private medical insurance – a very valuable insurance for people to consider. And the last is general insurance, helps you cover important items such as your car, your home and items around the house.
So there you have it, the foundations of financial success. Know what you want. Have a plan how to get there. Get organised financially and ensure your financial foundations are in place.
So let’s check back in. How did we do? In the beginning of this masterclass you wrote down a couple of outcomes that you wanted to achieve. Have you achieved them? What actions do you now need to take to move yourself forward?
To find out more about how to take control of your finances, head over to aviva.co.uk/money-hero where you can find more useful resources and downloads from yours truly. You can also connect to me on my website at warrenshute.com or on the social media links below.