Month: March 2021

Wealth Management

7 Common Financial Planning Mistakes That You’re Probably Making

Author ByCFI.co

The average household in Britain has over £15,000 in debt. You may think to yourself, well I’m not out £15,000. There’s no way I’d ever accumulate that much debt. 

Debt is often connected to large purchases like homes, automobiles, or student loans. We know about that debt. We are prepared for it. 

But the debt that creeps up over time is the trickiest. A little bit here, a little bit there seems fine. Before you know it, though, you’ve matched that £15,000 and then some. 

Don’t let small mistakes in your financial planning lead to big debt. Check your habits against the following seven mistakes that we see most often. Read through for tips on how to avoid them and what habits to adopt instead.

1. Putting Your Emergency Fund on Hold 

One of the most common financial planning mistakes is not having an emergency fund. This is enough money to cover your basic expenses for at least three to six months. 

Maybe you’re in school or working your minimum-wage first job out of university. Saving what you can, even if it’s £20 a month, makes a difference.

But over the course of a four-year degree, that £20 a month grows to nearly £1,000. And that doesn’t include interest earned from your bank!

You may be out of school and established in your career. If you do not have an emergency fund, you need to start one as soon as possible. 

Begin by sorting out how much money would cover six months of expenses (Netflix or Amazon do not count). Divide that number by how many months you can take saving up for it.

Once you have a plan, get your first payment into a bank account with a decent APY.

2. Paying Down Debt Without Saving

You may not have an emergency fund because you’re paying off student loans. You aren’t alone! In fact, in England, 1.3 million students receive financial aid each year.

But it’s imperative to keep saving even as you pay off your debt.

Loans often come with steeper interest rates. So your best course of action is to make larger payments against your debt upfront. In tandem, make smaller payments toward your savings. 

Once you’re debt-free, you can save faster. Consider saving the same amount you were using to pay off your debt each month. After all, you’ve already practised not using that money for other things.

3. Not Saving for Taxes 

Smart financial planning accounts for every expense, and that includes taxes! You try to think of everything: the mortgage, the kids’ education, daycare, pet care, investments, retirement. It’s easier to forget about taxes while planning your finances because they come up only once a year. 

When you do get your tax return, you don’t want to find yourself pulling from your savings account. Average the taxes you paid over the last five years and divide that by 12. That’s the minimum amount you should be putting away each month for your taxes. 

If you are in Australia, take a look at Sydney’s dedicated SMSF advisers for advice. 

4. Not Budgeting for One-Time Expenses 

Alright, so you’ve made an emergency fund, you’ve paid off your debt and you’ve budgeted for taxes. Well done, you! Next, we’re going to consider the other annual, one-time expenses you may not be considering. 

For example, one annual event, in particular, comes around the same time every year in December. You may recall a lot of expenses associated with it: ribbon, wrapping, gifts and cards. We’re talking, of course, about Christmas. 

It could be Christmas, Hanukkah or your child’s birthday party. Either way, make sure you add these one-off expenses to your budget. Think of it this way: a budget is also a great way to keep from overspending during the next holiday season.

5. Living Beyond Your Means

Speaking of overspending, that’s one of the easiest financial planning mistakes to make. Here’s where your consumer debt can creep up on you over time.

It starts with one handbag that’s just a little over your price range. Or a fantastic deal on that new teapot online even though you really don’t need a new teapot. It could even be buying your morning coffee at the cafe instead of making it at home. 

These £5, £10, £15 splurges here and there may not seem like much, and they aren’t if they’re one-time-only purchases. But over days, weeks and months, you’re subtracting hundreds of pounds from your budget. 

If you want to be able to splurge now and then, add it to your budget. Put away a few pounds a week and treat yourself to a fancy cafe treat once a month. Save up for that nice handbag or decide whether you can live with the teapot you already have.

6. Not Diversifying Your Investments

If you’re not investing (and you don’t have heaps of debt to pay down), you should start. It’s the best way to see your money grow over the long run.  

But one mistake we see with new investors is not diversifying their investments. What this means is putting all your money into one kind of industry. For example, investing everything you can into real estate investments. 

This isn’t a wise way to invest because it leaves you at a higher risk. If the real estate market drops, you’ll suffer a greater loss than if you’d diversified. If you’d invested in real estate as well as lumber, technology and food, for instance.

If you’re not sure whether you’ve diversified your accounts, speak with your bank or an advisor. They’ll be able to offer suggestions on ways to improve your profile.

7. Ignoring Your Company’s Retirement Plans 

And while we’re on investments, let’s talk about saving for retirement. Even if you’re in your twenties or thirties, you should be contributing to a retirement plan. 

And while we’re on investments, let’s talk about saving for retirement. Even if you’re in your twenties or thirties, you should be contributing to a retirement plan. 

Thankfully, many companies offer retirement savings plans to their employees. These plans usually take a portion of your paycheck and put it into your retirement account. Sometimes, companies will even match your contributions up to a certain number. 

Either way, it’s worth looking into! It saves you from spending that extra money and gives you an added incentive to save.

Strategies for Financial Planning

Organizing your finances may not be the most glamorous undertaking, but it is a critical one. Use these financial planning tips to help you navigate your finances with confidence.

And if you’re curious about getting started with a financial advisor, check out this article.

Private Equity

6 Types of Private Equity

Author ByCFI.co

We live in an unstable financial world. This has meant that those seeking to invest are desperate to know where they can find a safe bet. As a result, interest in the different types of private equity (PE) has gone up.

Private equity is an investment made by funds who are not listed on the public stock exchange. Companies use the funds for a range of different things but the end goal is the same for any investor, a return on investment. 

So how many different types of private equity are there?

Let us show you and after reading you will see that there isn’t an area of business that doesn’t benefit from the various types of private equity.

Venture Capital 

Made famous with the tech boom of the late ’90s, venture capital funds invest in start-up, emerging, or small businesses. This is done with the hope of a return on investment should the company become successful. 

There is a clear risk in doing this as these companies don’t have a solid track record of turning a profit. However, the potential sizable windfall has made them very lucrative. 

Young companies on the market for the support of venture capital fall into two categories.

Early-stage funds focus on looking for budding enterprises with extremely capable leaders looking for capital to develop technologies etc. Later stage funds for emerging businesses that may have already exhibited a profitable business plan and may be looking to expand or step into new markets.

Examples: Whatsapp and Facebook started life being funded by VC’s. 

Leveraged Buy-Out

A leveraged buy-out is when a PE fund uses part of its capital as well as borrowed funds to acquire a controlling stake in a company. 

Operating similarly to a mortgage, capital is raised (up to 90% through loans) and the existing debt is offset by any profits gained by the company purchased plus any existing assets that they may have. 

The goal of any PF fund who performs a leveraged buyout is to stimulate the profitability of the newly acquired business. To do this they will reduce expenses or change their financial strategy via financial engineering. 

Mature, profitable businesses are prime candidates for LBOs due to the high levels of debt that are involved.

Examples: Heathrow Airport, Manchester United and Hilton Hotels are some famous examples that have been involved in LBO’s in recent history. 

As a comparison, a management buyout is a form of acquisition in which a company’s existing management acquires most or all of the company from its parent company or non-artificial person.

Growth Capital 

At times a company may wish to expand or step into new markets in a way that they feel will be profitable long term. To do so however they need the money that they don’t have. In this case, a PE firm can choose to invest to stimulate this growth, which is the basis for Growth Capital.

Companies in this position are usually stable and financially secure. This means that although similar to VC, investors take minority stakes and leave the day to day running of operations to the business.

Growth capital funds are willing to invest in businesses that they see as reliable and profitable, even if at times the company in question doesn’t have a long track record. This means that they sit in the middle of VC’s who look for new blood and LBO’s who need a sure bet. 

Examples: Deliveroo is seeking to benefit from $180 billion received due to growth capital.    

Real Estate 

Investing in real estate is perhaps one of the most well-established types of private equity. This is likely due to the constant and steady cash flow investors enjoy over time as well as the potential of high returns. 

Commercial real estate is where most of the investment goes. This includes such things as office blocks, shopping centres, multi-family apartment buildings. Other areas such as land are also included however this is more speculative and therefore seen as more of a risk. 

Investing in real estate on this scale in the past has only been open to high net with individuals or institutional investors. The reason? The large amounts needed to contribute.

Examples: Blackrock is the biggest private equity firm in this sector with properties as diverse as the MGM Grand and Bellagio in Las Vegas to Center Parks in the UK.

Infrastructure

Investing in infrastructure involves three main areas of investment, utilities, social and transportation. 

Utilities include investing in the energy sector, water distribution and telecommunications. Social investments involve education facilities and hospitals and transportation can include toll roads, rail and airports. 

Why are these types of private equity desirable? 

Well as they are providing essential services, even though there is not much room for potential growth, it is a low-risk investment. This means you as an investor can rely upon steady and stable returns.

Additionally, infrastructure funds allow more flexibility in where your money lies, meaning it is better protected in an often volatile market.

Distressed Private Equity

More and more on the news, we hear of companies facing hard times being bailed out at the last minute by private investors. 

These types of private equity are known as distressed private equity. 

Getting involved in distressed private equity will require a wide range of skills on the behalf of the private equity fund involved. Not only the standard business acumen is necessary but an understanding of bankruptcy laws and capital and credit structure among other areas of expertise may be called upon.

So why would someone choose to invest in a company going through major difficulties?

Mainly because the purchase value becomes so low that they can make a massive profit from turning fortunes around. Any future sale or even going public can make distressed private equity extremely lucrative. 

Examples: The trainer brand Converse filed for bankruptcy at the turn of the millennium and was saved by Footwear Aquisition Inc for $117.5 million. They later sold it to Nike in 2003 for $305 million.

Clarity on the Different Types of Private Equity

Deciding where to invest your money, is one of the decisions in life that can have the most ramifications for you or your clients future. 

For that reason, we hope that this deep dive into the different types of private equity has left you with a clear idea about the available options. 

If you would like further advice or you have a question that needs answering don’t hesitate to contact us!

Investment Management

8 Essential Money Management Tips for 2021

Author ByCFI.co

Money: it makes the world go ’round. Not only do we need it to pay bills and buy groceries but to send our kids to college and eventually retire. 

The trouble with money, however, is that it’s difficult to manage. We spend it so frequently and on so many different things that we can have issues maximising its usefulness. 

This is why it’s important for you to brush up on your money management skills. Need a little help with the matter? Then read on because here are eight essential money management tips for 2021. 

1. Establish a Budget

The first thing you should do is establish a budget. This will help you see where your money is going and how much money is left over after you’ve paid all of your necessary expenses. Necessary expenses include rent, utilities, taxes, insurance premiums, groceries, gas, and the like (things that you have to pay for in order to survive). 

To create your budget, we advise you to use either a phone app or an online spreadsheet. There are all sorts of budgeting apps out there, including Mint and Personal Capital, to name just two.

Use these apps to write down the name of each expense as well as the amount of money that you need to allocate to each of them. This will show you how much spare money you’re working with each month, helping you to realise new ways of spending your disposable income. 

2. Track All Spending

In addition to creating a budget, you should also track all of your expenses. This includes non-necessary expenses as well as necessary expenses. Non-necessary expenses include but aren’t limited to money spent on hobbies, money spent eating out, money put in savings accounts, and the like. 

Only by tracking these expenses can you know whether or not you’re over or underspending in a particular area. For instance, you might find that you’re spending too much on fast food and too little on your retirement contributions. 

If you don’t track your spending, you become susceptible to making an excess of frivolous purchases. These purchases will provide you with a feeling of quick gratification but will hurt your financial standing in the long-run. 

3. Save for Emergencies

Life is unpredictable. Rarely do things go to plan. Whether it’s a perfectly good furnace that stops working in the dead of winter or an automobile that gets sideswiped by an aggressive driver, emergencies do occur. 

What’s important is that we have the money saved up to help us get through these emergencies. If we don’t have this money, we’re forced to turn to credit cards, and once we turn to credit cards, we start sinking further and further into debt. 

This is why, every month or so, you should be putting some of your money into an emergency fund savings account. Generally speaking, it’s wise for your emergency fund to equal 3 to 6 months of your average monthly expenses.

4. Contribute to a Retirement Fund

You don’t want to have to work for the rest of your life. In fact, if you’re like many people living on this planet, health issues will eventually prevent you from doing so. This is why you need to contribute to a retirement fund. 

Generally speaking, it’s wise to contribute 10% to 20% of your income to retirement, year in and year out. 

5. Take Advantage of Multiple Accounts

One of the reasons that some individuals have trouble managing money is that all of their money exists within the same bank account. As a result, they end up spending money that they would have used for other purposes. For instance, instead of using the money for future healthcare expenses, they end up spending it on fast food. 

How do you get past this problem? The answer is to take advantage of multiple bank accounts. This way, you can separate everyday spending money, emergency savings money, healthcare savings money, and otherwise. 

6. Set Goals

You should always have financial goals that you’re working towards. Whether this is buying real estate, purchasing a car, stashing money away for retirement, or otherwise, setting goals can help to keep you on the straight and narrow. 

If you don’t set goals for yourself, you’re likely to spend money on hollow purchases. For instance, you might overindulge in food or alcohol or musical performances, or athletic events. 

7. Pay Off Debt Strategically

If you’re like many people on this planet, you have debt to pay off. This could be credit card debt, student loan debt, a mortgage, an auto loan, or otherwise. In any case, you should pay it off as strategically as possible. 

First, see if you can get any of your interest rates reduced. You might be able to refinance with a different lender or you might be able to talk down one of your current lenders. It’s possible and certainly worth a try. 

Next, establish a debt payoff plan. We recommend attacking the high-interest debt first. While doing so, just be sure to pay the minimums on your other loans. 

The reason for doing this is to eliminate some of your interest burdens. The quicker you pay off the principal, the less interest you’ll have levied against you. 

8. Set Some Money Aside for Fun

While you don’t want to spend all of your disposable income on non-necessary expenses, you should still spend some of it on them. After all, if you’re not having fun in life, you’re barely living in the first place. 

It’s often recommended that you set aside 30% of your income for fun money. However, this isn’t manageable for everyone. Meet your savings goals first, and then budget for fun. 

Need More Help With Money Management? 

Money management isn’t an easy matter. It can take a lot of research and a lot of practice. If you need assistance with it, our website can help. 

We have articles on everything from business to economics to hedge funds to insurance and more. If you’re looking to brush up on your financial expertise, this is the place to be. 

Browse more of our money management strategies now!