Long terms savings provide long term security is nothing new. But for me as the parent to a young person with additional needs it gives me the knowledge that if I get the majority of everything thing else right in raising my daughter to have a sense of her own worth and the skills to live her own life, then there will be money for her to live that life securely.
Long term savings are about creating a savings pot to leave behind (that’s not to say I might not use a small amount for a couple of those items on the bucket list). So how do I propose to create my long term savings pot? As the saying goes, like eating an elephant: one mouthful at a time!
The first thing I do is follow the 10% rule, pay yourself 10% before anything else. Why? because if I pay myself first and always put that money into my long term savings, I will be a long way towards reaching my goal of giving my daughter a secure future. This means looking at how much I earn each month and multiplying it on a calculator by 0.1 to decide exactly how much that 10% is that
month. Then I always (and that’s the important part) put that 10% in to my long term savings pot. I do this first before before I pay bills, food, etc. Of course I don’t mean to make it sound that easy, sometimes it isn’t, but I really believe that this habit of paying 10% to myself first is possibly the best thing I can do to guarantee I achieve my long term saving goals.
The second thing is I don’t leave my long term savings in a bank account as cash. Why? because I don’t believe cash will give me a good enough return in the long term. While compound interest does ensure cash builds up, cash over the long term doesn’t perform as well as investments in the stock market or property market. Leaving savings to compound in value in other asset classes tends to do better than leaving it in cash, even if I would concede cash is a safer form of investment. I do, however, have cash based savings for my 3 months living expenses and medium term savings, because I might need to use that money at some point so it needs to be easy to access.
The third thing I use is a pension fund. Why? because me having a pension means I secure my own future, and so I won’t need to spend all my long term savings later in life. In most parts of the world pensions have the benefit of being tax efficient because contributions are made before tax. This means your income is reduced and you don’t pay as much tax. In the UK I have found it beneficial to make top-up contributions to my State Pension for the years I spent living outside the country. But for everyone, no matter what part of the world you’re in, a pension fund where either the government gives you a tax break or your employer makes contributions on your behalf is a good thing. Part of securing my daughters financial future is ensuring that mine is also secure and pensions are an essential part of my future.
The fourth thing I do is to monitor net worth. Why? because only by knowing if I have any money will I know whether I’m going to leave my daughter anything. I use a net worth spreadsheet and update it yearly. You can download free Net Worth excel spreadsheets in Pounds or in US Dollars . Obviously my house is a big part of that, but it isn’t the only thing. I know in the end it isn’t how much I earn that is important, it’s how much I’m worth. If I earned a million pounds a year but spent it all, then it means I wouldn’t have left any more to my daughter than someone who’d earned a fraction of that but diligently put money into their long term savings.
In the end net worth will determine how much I leave my daughter. While a pension fund doesn’t solve the problem of giving a savings pot to her, it does give me the security I need for myself later in life. If I have a decent pension I shouldn’t (I hope) need to use the long term savings. That discipline of saving 10% from now onwards would have been worth it.
After all the main goal of my financial planning is focused on making sure that my daughter with additional needs is financially secure. If I can do this one thing then I believe that I am maximising her opportunities for a fulfilled life and the level of independence she desires.