Ian Richards is a Chartered Financial Planner and Founder of Work to Live Financial Planning.
He’s on a mission to take the BS, jargon and complexity out of financial advice to help people narrow the gap between the life they want and the one they are living.
We’ve all been advised from our parents’ generation. Some good, some bad, some we listen to and, more often, some we don’t. One area in particular where this advice seems to be the same is around money and careers.
I’m sure you have heard the following over the years:
- Get a degree
- Get a good job
- Work your way up
- Work hard so you can retire
- Don’t get a credit card
- Freelancing? Don’t you think you should get a proper job?
- Don’t spend money on xyz
Or even specific financial advice such as:
- Property is the best investment I’ve ever made
- Buy a house straight away and spend as much as you can afford
- Renting is like throwing money away
- Don’t invest in the stock market – it’s just gambling
- Save into your pension
Of course, a lot of that generation’s advice is useful but does it relate to the world we live and work in now? For example, when was the last time you paid for something in cash or did you just put it on contactless? Buy a house? Yeah great – remind me how much those London house prices are again?
The world of work has changed dramatically since the 60s, 70s and 80s, and so has the way we need to look after our money. When our parents were growing up, there was affordable (and free) education, no student debt and stable employment. They could look forward to a comfortable retirement thanks to their employer pensions.
There are now an estimated 5 million self-employed people in the UK, of which 2 million are freelancers. When your parents started work, their employers looked after them well giving them life insurance, sick pay, company benefits such as cars, shares and phones. They were also most likely a member of a wonderful pension scheme that gave them a fixed amount of their final salary when they retired.
Even for employed people, nowadays a lot of these benefits have gone, and freelancers aren’t getting any of them. If you can’t work you don’t get paid, and whatever pension you need will have to be funded by you. You have to take responsibility for sorting all these things out.
The fact is your parent’s advice is probably based on a predictable and stable income. Freelancing is lumpy income, and it can vary each month, so how can your parents understand the challenges that come with managing money if they have never experienced this firsthand?
Most advice is, of course, well-meaning, but remember that anyone giving you financial advice, whether it’s your parents or your best mate down the pub, doesn’t understand your specific situation so they can’t see the full picture.
What you want out of life is probably very different from what your parents wanted for themselves. It might have been all about working as hard as you can to get to an arbitrary age like 65 so you can retire and do nothing. Is that what you want?
Ask yourself, “why did I go freelance in the first place?” My guess is to have flexibility over your work, to do something you are passionate about and escape the corporate world. So why take advice that isn’t related to this? Who wants to wait until they are 65 to start living the life they want, sorry but b*****ks to that! I’m sure you were told it is extremely risky going freelance, but what about the risk of spending your whole life not doing what you want, on the bet you can buy yourself the freedom to do it all later. So, if you are thinking about taking your parents’ advice, ask yourself if they truly understand what you are trying to achieve and are they coming from the same perspective as you?
Let’s tackle some of the main areas of advice we often hear from the generation above us and how it might relate to you as a freelancer:
“Renting is a waste of money”
Ignoring the difficulty of getting onto the housing ladder, you need to consider what is best for you not solely from a financial perspective. Do you want or need the flexibility to be able to move around? Do you know where you want to be living in the next five years, will it still be the same area? If your circumstances change, such as having children, would you still want to be in this area? Your parents will likely approach this from “well property only goes up, renting is just lining someone else’s pockets” but can you afford to buy in an area you would want to live? Consider what is best for you, do you want the flexibility renting brings in terms of where you live? What if you’re going to up sticks and move abroad? If you buy a property and it turns out to be the wrong choice for you, the financial impact of this mistake is likely to be greater than renting for another year or two. So, take your time and think whether it is the right decision for you.
“Invest in property”
Property is an asset like anything else and can fall in value, but people are biased by their own experiences. Property is most likely the only investment they have had, and they are probably not factoring in all the money spent on the house, the cost of interest payments, all the extra bills they had to pay and the impact of inflation. I am not saying that a property isn’t a good investment or you should never buy, just take what they are saying with a pinch of salt. You have other options for your money and when looked at objectively, investing in assets such as stocks and shares could give you a better return over the long term, but remember investments can fall as well as rise.
“Save into a pension”
This is actually great advice, and you should start this as soon as possible, but irregular income can make this difficult, especially if you are in debt or saving to purchase a property. For many people committing a monthly amount to a pension is not feasible when starting a freelance career. There is also the issue that any money saved into a pension cannot be accessed until you are at least 55, and likely later.
There are other options for your savings if you are concerned about tying your money up for over 20 years. You can look at saving into an Investment ISA, and you could invest this in a similar way as you would do with a pension, i.e. stocks and shares so you could look to generate a return. There are pros and cons to both approaches but you have other options, and the main thing is to start saving ASAP.
“Investing in the stock market is too risky, keep your money in cash”
What they probably mean here is that there is too much uncertainty when you invest in the stock market. There are of course risks associated with this, but there are ways to mitigate these by understanding the role of risk in achieving returns, understanding your comfort level with risk (what advisers call attitude to risk) and by diversifying your investment. These are all areas that a financial adviser can help you with, as well as support you through the natural cycles of the market. However, the likely biggest risk is leaving your money in cash where inflation is eroding it away. With excess income, you can invest for the longer term and it is appropriate to take some risk with this money, in line with your objectives, as this is what is going to increase your wealth in real terms over time.
Do you have the basics covered?
It’s not just the advice that parents give, it is also the areas that they miss or haven’t considered. One of the biggest things for a freelancer is to ensure they have an emergency or “confidence” account of between 3-6 months of expenses in cash to cover slower times. You also need to ensure that you have appropriate policies in place like life insurance if you have family or dependants. The biggest area often overlooked or ignored is income protection. This is a policy that will pay out if you are unable to work due to accident or sickness. Remember, you are on your own, and there is no company paying you while you are off sick. If you have moved from the corporate world, make it a priority to replace the additional benefits that your employer once provided.
Remember, your circumstances are unique so what might have worked for someone else may not work for you. While your parents’ advice will always be well-meaning, you need to be empowered to look after your own financial wellbeing in a very different climate to what their generation experienced.
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- Track your spending. Your parents were actually onto something with “Cash is King”, it helped them know how much they were spending, and it feels different to swiping a card. Now you flash a card without it even registering, making it even harder to keep track of. There are some great apps and challenger bank accounts who can help with this, such as Starling and Money Dashboard.
- Set up a spending plan for each month. I would recommend having two spending plans – a base one for when you are not earning as much, so you can ensure that you can cover what is outgoing, and then another one for when you are earning more and can enjoy yourself more. This way, you ensure your spending each month is within your means, and you won’t build up debt in the lower-earning months.
- Once you have your emergency fund, start investing! Even if it is only £50 a month, it will get you into a good habit, and you can gradually increase the amount as you start to earn more.
- Invest in yourself! The biggest driver for your financial success is going to be how much you earn. The more you earn, the more you can save, spend and invest. So, do that extra training and upskill, you’re your own golden goose! Just make sure you avoid the lifestyle creep that comes as you earn more.
Freelancing brings great opportunities to individuals and the lifestyle they can live, but it is different from the corporate 9-5 world and brings its own challenges. Just make sure that any advice you are taking is relevant to you and how you want to live your life. You are not your parents, so don’t assume their advice is right for you!
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