Editor’s Note: The contents of this article discuss personal finances from the perspective of someone living in the UK. Please visit VENTEUR’s personal finance collection for US-based perspectives.

VENTEUR spoke with James Lindley, founder of Castell Wealth Management, about mastering our personal finances. Castell Wealth Management is a London-based financial advisory firm whose mission is to teach individuals and companies the art of managing their finances in a thoughtful, sustainable and tax-efficient way to achieve their Future Perfect.

Personal Finance (Generally)

What is financial literacy, why do so many people struggle with it, and how can we become more financially literate?

Financial literacy is a problem across our country, across America, and all over the world. Because in school, they don't teach simple concepts like interest, compound interest, growth, debt, and all these financial terms.

We, as financial advisors, have the goal of filling this gap.

So, financial literacy is an understanding of critical concepts probably broken down into three areas: 

  1. The knowledge of personal finances.
  2. The skills to circumnavigate thru difficulties in managing your money.
  3. Your attitude toward money.

How can we manage our money more confidently, and what would this look like in practice?

Simple things like not overstretching oneself. Also, budgeting–having monthly, weekly, and yearly budgets and keeping track of them.

Putting money away for savings. Putting away short-term, medium-term, and long-term savings. Short-term is cash. No more than three months' worth of salary in cash.

Medium-term 2 to 5 years. High array interest investments, savings, or something that will give you some growth.

Long-term is taking advantage of tax relief. In our country, there would be pensions for later retirement when the individual stops working.

We strongly recommend getting professional advice. How do you manage your money more confidently? You get advice on it and speak to a professional. You understand what you are trying to do. Every client has their own 'Future Perfect' plan, so to help individuals manage their money better, having goals-based plans is a better way to help them achieve what they want.

Should investments into VC funds be included in one's portfolio? If yes, why? If not, why not?

Venture Capital funds are significant asset diversification from the traditional investments people tend to have when the industry meets them. So they are not for everyone, but they should have a place for individuals with more than basic planning needs. In the UK, that would be people with higher additional rate tax liabilities and people with investments outside of just essentials like pensions, ISAs, and property. 

Why should one do it? In our country, there is the ability to get tax relief on investment, so the individual will have 30% income tax relief to offset income tax liability. It will also give them the ability to provide tax-free dividends as part of their income even now or when they stop working. Also, it will give them returns that are uncorrelated to other asset classes or at least not correlated to different asset classes.

[Keep in mind that] i's not for everyone because assets are locked up in a venture capture trust for at least five years. So they are less liquid than other investments, which means that if people are going to need that money in the short term is not suitable for them. And obviously, those investments are more volatile over a short period. So, it's not for everyone. 

What out-of-the-box tips can you share to help us better approach personal investing, and why these three?

Having goals-based plans as opposed to finance-based goals. By that, I mean measuring the success of what you are doing and achieving based on your ability to achieve your life goals and not on your investments and the return on your investments. A client will succeed if they complete all the things they set out to achieve, not by a client being successful just because they had a good year of investment return. Because the market is volatile, it goes up and down all the time, and this is about thinking long-term about what people are trying to do and their approach to personal investing.

Understanding what you are investing in, we see many people investing in something they don't understand. And that comes down to that knowledge and attitude piece. Are you taking the time to read and understand the things you are investing in? Are they suitable for you? We, as a firm, have been anti-cryptocurrency for the last 2 or 3 years. It means that clients will do that elsewhere, but ultimately it told us that we are protecting most of our client base from a lot of volatility in recent months. But if people want to do personal investing, they should go for things they currently understand. 

Don't invest in anything you don't understand. If you don't understand it, it's probably not suitable for you.

[You can also] automate your savings habits. As a rule of thumb, 50% of your monthly spending should be spent on things like living costs, rent, and mortgages, 30% on food, heating, and that type of thing, and 20% should be saved each month. And by automating your saving habits, there is less risk of it going wrong. 

If a direct debit comes out every month, it's done. So you don't have to overthink it. Every time you get a pay rise, you should reassess it.

Insurance

What types of insurance should we consider being covered by, and why?

Your insurance type depends on whether you are employed, self-employed, or retired. It depends on where you are in your life stages, your family situation, and your liabilities. So, no solution fits all. It is essential to take advice with these insurances. 

We tend to find that people don't think twice about insuring their house, car, or iPhone. But, as individuals, we are more significant assets. By turning up to work, we can earn money and save money for the rest of our lives. However, if something happens to us, that ability might cease. Individuals are more than happy to insure their cars, toys, and sports equipment. 

Whatever else it is, it is ultimately more important to insure yourself against critical illnesses, protecting you from losing your income. So, if you lose your income, protection in having insurance in place for your family if you are no longer there, and simplistically, as a bare minimum, you should take care of your debts if you are in a family. You got a big mortgage on your house, and you might want to make sure that that is paid off, but also think about what you need if you die for you and your family to provide you with freedom of choice if something happens to you. 

Taxes

What tax complications can entrepreneurship present, and how can entrepreneurs protect themselves from the beginning?

In the UK, there are various tax complications that entrepreneurs face. The first one is normally when they are setting up the business, whether they do so as a sole trader or whether they do it as a limited company. Or if they do something in the middle, like a liability partnership. Often entrepreneurs think about selling their business, so again, each structure will have different consequences for things like shared ownership, taxation, control, and the impact on them when it comes to selling that business.

Often entrepreneurs are paying themselves little to no income and investing all that money back into the business to enable the company to grow. The tax complication is that if they are not paying a lot of taxes, things like being able to mortgage become more complicated, being able to borrow, and doing what your employed peers can do becomes harder. 

They then also have complications around selling shares in the business. In the UK, if you sell shares in a business, you pay capital gains tax, and if you exit the company, there will be a tax on your exit. 

It's more about navigating those taxes and understanding them as your business grows and continues to grow and what you can do to protect yourself initially. Make sure you take advice, make sure you understand your company journey and what your plan is, and make sure you make provisions for yourself as well as for the company. 

So simple things like in the US doing 401k, in the UK doing a pension. In the UK, that's corporation tax deductible, reducing your taxes as a company but also affecting the transfer of assets into your name.

When thinking about your finances, there is also financial education. However, there are also things that people don't think about that they should, such as:

  1. What are you trying to achieve?
  2. Who are the key people in your plan?
  3. What are the key milestones/events in your plan?
  4. What's your attitude to money?
  5. What does your perfect retirement look like?
  6. What do you want for your family if the worst happens?
  7. What are your timescales for all of the above?
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