When you haven’t got much capital of your own, the road to financial security can seem long, hard and complex, but the truth is that wealth building is relatively simple. All it takes is time and the price of a cup of coffee.

This blog by Dimensional Fund Advisors’ Jim Parker, is a great illustration of how much can be achieved with a little effort early on, combined with some willpower and patience.

The son of a friend just graduated from university. Still in his early 20s and with student loans to pay off, James has hardly any savings or capacity to save much at all.

So James and I met for coffee and a chat. He had acquired a taste for espresso while studying and working at night waiting tables (the coffee kept him awake).

“How much do you spend on espresso each week?” I asked him. After thinking for a moment, he replied that he averaged about two cups a day, each costing £2.50. That equated to about £30 a week or £120 a month.

“Well, what if you sacrificed the coffee and put the cash into a savings scheme instead?” I suggested.

James looked doubtful. Kicking caffeine wouldn’t be easy. Besides, he couldn’t imagine that loose change spent on coffee would make much difference to his long-term financial position.

I dealt with the  problem by suggesting he make a coffee budget – the thought of making instant coffee at home and bringing it into work each day in a flask didn’t appeal. The coffee budget would give him £30 worth of caffeine each month. An immediate saving of £90.

Here’s the thing though. By limiting his coffee expenditure to just £30 it dropped to almost zero overnight. With a limit of only 12 espressos a month he had to be sure he really, really (and I mean REALLY) wanted one.  The result was more often than not he decided he’d wait and “save” the espresso until later in the month (when he REALLY needed it). Now each espresso really had to count. Pretty soon he’d cut back his coffee expenditure to about £10 per month.

The benefit? An extra £110 a month in his wallet.

With an initial balance of £357, a monthly contribution of £110 and a yield of 5%, his coffee money would gradually accumulate to a pool of a quarter of a million pounds in a little under 47 years – and just before his state pension age. And this was without increasing his expenditure by a single penny.

Assuming James’ salary was to rise on his graduation, he might bump up that monthly contribution to £500. In this case, his savings pool would grow to well over a million pounds by the time the state starts to pay him a pension.

This sounds too easy, he said. That’s because it is easy, I replied. The interest he earned on his saving was paid into his account and included in the next calculation. So he was earning interest on interest.

The key was that firstly he was starting early. Secondly, he was saving a small amount consistently month after month. Thirdly, he was exercising patience. The rest of it was just the effect of time and compounding.

(Obviously, this young man’s earnings will be subject to tax, but the purpose of this exercise was to show him that a small sacrifice, made regularly, would yield significant results over time.)

James now refers to his savings plan as his ‘espresso portfolio’. The initial pain of kicking his expensive caffeine habit was made up for by the slow roast of a savings scheme that promised him a comfortable retirement.

Even for those of us much older than James, there are lessons here. We tend to underestimate the effect of gradual saving and patience in building wealth, just as we tend to over-rate gimmicks promoted in the media.

We can’t control the ups and downs of markets or the daily noise of the media. We can control our own behaviour. With slow and steady saving, and a trusted advisor to keep us disciplined, there is no reason we can’t succeed.

Now enough of this talk about money. How about a coffee? Put the kettle on then…

One of the UK’s most popular active fund managers, Richard Buxton, announced last month he is leaving Schroders for Old Mutual. His £3.5bn UK Alpha Plus Fund has performed well by conventionally accepted standards and is ahead of its FTSE All Share benchmark over most time periods.

People who hold Mr Buxton’s fund might be wondering, therefore, whether to follow the star to Old Mutual. In fact Schroders is so concerned about an exodus it warned that up to £1bn was at risk of switching or redeeming. Already £250m has left.

But how many investors really think about what drives good performance? How many really know whether they are buying the man or the market and which is more reliable in the long term?

Mr Buxton’s fund, for example, is billed by Morningstar as one that buys large companies with no particular bias towards value or growth shares. But it has a distinct tilt towards smaller companies rather than the market average it is measured against.

This means when small companies outperform the wider market, as they tend to do over time, Mr Buxton’s fund will probably also outperform. This is good for investors in the fund who share this outperformance but, given the fund’s billing as a large companies fund, they may be unwittingly exposed to more risk than they expect.

And given that investors in smaller companies can expect higher returns for taking that additional risk, they might want to compare the fund’s performance to them rather than the whole market. On that basis, the fund’s performance is very much as you might expect.

This is not to say that Mr Buxton is not a skilled investment manager and should not be followed, or that his successors cannot continue his good track record. The point is simply that successful investing is often more about understanding the sources of market return (and how to capture them in a systematic, low-cost way), than it is about picking a star manager and hoping to ride on their coat tails.

It’s important to understand where returns are coming from and whether they’re down to the market or manager.

I suppose that after more than 30 years in financial services, I could say that I have seen and experienced more financial ups and downs with clients than most.

From my first days back in 1979, it was a lesson soon learnt, that if I came across a prospect who was underinsured then it was expected that I should move heaven and earth to make sure that the prospect became a client and that his/her family would never have to suffer the indignities and the hardship that can be brought about by the loss of a breadwinner.

It’s a well known saying in our business that ‘you know when you are going to get old but you don’t know when you are going to die!’

The indisputable fact is that one never knows what is lying around the corner, something that has been uppermost in my mind whenever addressing an individual’s protection needs. The number of times that I have heard it said – ‘My god, I am so glad you persuaded my husband to take out that life assurance, I would be absolutely lost without it ‘.

In June last year, someone very close noted that his life assurance was due to mature and recognised the fact that steps would need to taken to reinsure. The person in question went through the neccessary steps to make sure that life cover was maintained.

Most of the life cover matured immediately before the London Olympics and it came as no surprise that the life cover in question was accepted at standard rates, having undergone both a full medical examination and received a private medical attendants report.

The remaining cover (30%) was due for renewal earlier this year and seemed to be a formality. Fate then took a hand, as only three months after renewal of the first tranche of life cover had been accepted, the unthinkable happened and cancer was diagnosed which mean’t that any chance of renewing that last element of life assurance was lost or at least deferred until a later date.

I am happy to report that the person in question seems to be making a full recovery having undergone extensive surgery and has been given the ‘all clear’ from the surgical team.

I make no apologies about sharing this story, you see that person was me.

It only goes to show, you can never tell what lies ahead. It would be easy to chastise myself for not renewing all life cover in one package as there was no reason to think or act differently, having said that and with the benefit of hindsight, I wish that I had, rather than have to wait for life assurers to make an underwriting decision in 18 months time.

So, the moral of the story, be alert, always check that your protection needs are upto date and don’t leave anything to chance.

Proposito Financial Planning has again been named as one of Constant Contact’s All Stars. We are part of a prestigious list of companies recognised for their outstanding email marketing practices in the past year.

Constant Contact is an email marketing company that provides marketing tools to more than half a million business customers across ther globe. Each year, Constant Contact bestows the All Star Award to a select group of businesses and nonprofits who are successfully leveraging online marketing tools to engage their customer base, and drive success for their organization. Proposito’s results ranked among the top 10% of Constant Contact’s international customer base.

Selection to the All Star list is based on a range of criteria, including frequency of communication, high click through rates, use of social media marketing , and regularly updated mailing lists.

We use Constant Contact’s tools to create our finance e-newsletter which goes out monthly to a range of clients and individuals looking to keep up to date with news, views and legislation within the world of personal finance and wealth management.

We produce all the content for the newsletter in house and try to provide a blend of informative as well as more light hearted  content.

To join our growing list of subscribers click on the ‘sign up to our newsletter’ link just below the search bar or click HERE.

The arrival of spring weather can be difficult to predict. Last year, we enjoyed a balmy March and as soon as the hosepipe ban was announced in April, it rained until Christmas. This year was going according to plan with temperatures steadily rising until we were struck by an unexpected Arctic blizzard.

One thing you can count on at this time of year, however, is the flurry of suggestions about how best to invest your annual ISA. Open the money pages of any newspaper; walk into any major mainline commuter station; tune into any local commercial radio station and you will be bombarded by adverts for top performing investments and savings accounts. In the gaps between the newspaper ads, commentators put forward their views about the merits of cash over bonds over shares; the US over Europe over Asia; and this over that or the other.

The reason for all this activity is that a large proportion of retail investment fund sales are made in the final weeks of the tax year in what the industry calls ISA season. Fund managers and distributors are geared-up to attract the many investors who leave their ISA decisions to the last minute.

And some do leave it literally to the last minute: a surprising number of ISA applications are made in the final moments leading up to the midnight deadline on the 5^th April. Online applications make this easy, but it was not long ago that people drove through the night to their local application form drop-off centre.

Even for these people, it’s a case of better late than never as the tax benefits of an ISA remain very generous. But to avoid the temptation of being drawn into this blanket coverage, here are two things to remember every time you see an ISA advert:

1. The timing of your investment decisions should be mapped out according to your long-term financial plans, not a seasonal industry-led fund sales rush.
2. You are better off with an investment strategy that is derived from decades of scientific investment research and careful implementation, not the advertising budget of a particular fund manager or the whim of a press commentator.

To find out how we can help you establish the right timings for your investment strategy and the impact that over 50 years of investment research could have on your investments you know what to do…

Here’s a summary of the major points from Chancellor George Osborne’s Budget, delivered on 20^th March 2013, which have the biggest impact for our clients and their families

Tax & Duty

• The limit of tax free earnings will be increased to £10,000 in 2014
• Corporation tax for businesses to be reduced to 20% from 2015
• The introduction of a new “employment allowance” will cut national insurance bills by up to £2,000. This will mean that there will no employers’ national insurance for 450,000 of the UK’s small businesses.
• The planned increase in fuel duty in September has been scrapped
• The planned annual increases in beer duty has been scrapped and replaced by a 1p reduction. All other planned increases in alcohol duties remain at 2% above inflation.

Housing

• The extension of shared equity schemes with interest-free loans up to 20% of value of new-build properties.
• New bank guarantees to underpin £130bn of new mortgage lending for three years from 2014.

Pensions & Families

• The single flat rate state pension of £144 per week will be introduced in 2016 – a year earlier than previously announced.
• The introduction of 20% tax relief on childcare vouchers up to £6,000 per child from 2015

Additional information to be provided as it’s released by the Government

We are delighted to announce that our Director and Financial Planner Huw Jones has passed his assessment to become a CERTIFIED FINANCIAL PLANNER^CM professional.

The prestigious CFP^CM certification is held by less than 1000 professionals in the UK and a global community of 150,000.

The path to becoming a CFP professional is a serious test of an individual’s technical ability as well as their ability to apply their knowledge through the completion of a detailed financial plan. It enables planners to demonstrate the ultimate in added value to their clients and is the only globally recognized mark of excellence in Financial Planning

New regulations brought into force at the start of 2013 by the Financial Services Authority required all Financial Planners to be qualified to Level 4, however this qualification awarded by the Institute of Financial Planning now takes Huw to Level 6.

CFP^CM , CERTIFIED FINANCIAL PLANNER^CM and  are certification marks owned outside the U.S. by Financial Planning Standards Board Ltd. Institute of Financial Planning is the marks licensing authority for the CFP marks in the United Kingdom, through agreement with FPSB.

At Proposito Financial Planning we’ve been “doing fees” for a long time. In fact ever since May 2005 that’s the only way we have done any work for anyone. So we think we’re more experienced than most when it comes to getting the fee right.

That’s why before we take on a new client we’ll whizz them round in the Proposito VORTEX. This helps us to determine an appropriate project fee for our financial planning service.

Value to you of us completing the work for you.
Organisation of your financial affairs and lifestyle.
Risk and return to the firm for completing the work for you.
Time it will take us (from start to finish) to complete the work for you.
Expertise required to complete the work for you.
X factor – The unknown measure of how easy it’s going to be for us to deal with you.

Of the six factors that control our initial fees for new clients you can exert the most influence on the X factor!  Here’s my five top tips to minimise the impact of the X factor on your fees:

1. Complete all forms fully
   Time spent competing paperwork and collecting information is not good use of our resources or expertise. Neither is chasing up missing or incomplete information.
2. Be responsive
   Respond to requests for additional information and clarification promptly so as not to delay things unduly.
3. Return paperwork
   There is a requirement in financial services for wet signatures on pieces of paper. Read all correspondence and return documents (completed and signed in the correct places) by return.
4. Be organised
   Have your papers and documents in order. Make sure you know what you’ve got and what it’s doing. If you have any questions write them all down and ask them all in one go when you get a chance. It’s much more efficient for us to deal with people who know what they’ve got and what it’s for.
5. Be engaged
   Financial planning is (up to a point) a collaborative project. It shouldn’t be the planner imposing their view of what your financial future should look like. Instead they should help you to articulate what you would like your financial future to look like by asking the right questions. Then they’ll use their technical expertise to develop solutions. If you’re not going to be available to engage, take calls, return calls, make meetings, devote time to thinking about your future then the planner’s job – to help you plan for YOUR future – becomes much, much more difficult. Running up a treacle covered hill in concrete boots pushing a very big rock springs to mind.

We work with plenty of people who fail all five – some quite spectacularly and that’s fine by them and by us. They understand that the value we bring to their financial lives by sorting all that stuff out for them is far, far greater than the additional cost we charge.

Now you might be wondering when we start assessing the X factor for new clients. It’s usually known before we’ve even met them. I’ll telephone for a brief initial chat (to introduce myself and Proposito). I’ll send out an initial Financial Planning Questionnaire (either an electronic or paper version).  It’ll be chased by email or telephone. We would prefer it filled in before the meeting but it’s not mandatory.

All these things will paint a picture of how easy it’s going to be to work with the client and because we see every client every year we need the X factor results.

Recent changes to Child Benefit have resulted in 155,000 people deciding to stop receiving payments, according to HMRC (as at 31^st December 2012).

If you aren’t one of the 155,000 people who have opted out and your earnings are over £50,000, then you will have to complete a Self Assessment tax form. This is because you will be subject to the High Income Child Benefit Charge, which taxes 1% of child benefit paid for every £100 of income between £50,000 and £60,000.  Over £60,000 and its 100% taxed!

However the actual level that HMRC use to determine your income figure is your adjusted net income.  Adjusted net income is your income minus any pension contributions and payments to charities.

Consider a family with two children (child benefit of £1,752.40 per annum) and one parent earning £53,000 per annum. They could make a pension contribution of £3,000 gross, which would reduce their adjusted net income to £50,000.  This means they would continue to receive 100% of their child benefit entitlement tax free and they would have made a contribution towards their retirement planning. With tax relief provided by the Government on the pension contribution they would have only actually paid £2,400.

But the good news doesn’t stop there. They can claim an additional 20% tax relief on the contribution as they are higher rate tax payers. This is reclaimed through self assessment and will result in a refund from the tax man of £600! On top of that their child benefit remains intact.

Impressive, Eh?

Let’s just summarise that:

• £3,000 in a pension but it only costs £2,400 up front.
• A refund of £600 after self assessment
• Gets to keep child benefit of £1,752.40 (for two children)

That means that £3,000 in a pension has only cost £1,800 and has saved an extra £525.72 in addtional tax on the child benefit. Now I don’t about you but if someone offered me £3,000 in a pension and it was only going to cost £1,274.28, I’d at least think about it.

If you haven’t received a letter and think they’ve forgotten about you they haven’t. Remember it applies to either parent with an income over £50,000, even if you are not the parent that receives the child benefit.

Why not see if you can make these changes work for you…

In the day and age of the ‘paperless’ office everyone (including us!) can still be found guilty of using too much paper. However we have still found a way to give back and remain compliant by shredding and recycling securely our unwanted paper. In the past 3 years we have saved 29 trees.  This may not sound a huge amount but www.carbonfootprint.com  says that each tree “offsets” your environmental impact by breathing in about 1 tonne of CO2 emissions over its lifetime. With an estimate that the average person needs to save about 7 tonnes of CO2 per annum, the 29 trees we have saved is a start.

This is only part of our progress towards reducing our paper usage and working in a more environmentally friendly way. With the continued development of online technology and the use of ‘Wrap’ platforms,  it is now possible to interact with, inform and update our clients quickly and effectively without using paper or anyone having to travel.  These new developments, not only help us to work more efficiently but also provide huge benefits to our clients by reducing their own paperwork, and saving them time and money.

We all need to do our bit to help the environment, so why not help conserve our trees and think before you print!

Sarah Kearsey is Office Manager and Senior Paraplanner at Proposito Financial Planning