The Squeezed Middle: Navigating Financial Pressures

Since the onset of the Covid pandemic (can you believe that was over 4 years ago now?), many individuals and families have found themselves feeling increasingly squeezed by a collection of financial pressures.

All resulting in less, if anything, being left at the end of the month. 

This isn’t just affecting those on lower incomes, but those who, only a few years ago were more comfortable, able to enjoy life and save each month.

The squeeze we're all now facing is down to 2 reasons.

The first, is the highest tax burden for 70 years, as the government tries to re-balance the books following a succession of global shocks, which have impacted its finances.

The second, is that inflation has rocketed, and significantly outpaced wage growth.

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Just how squeezed is the middle?

Well, we all know inflation has been incredibly high, which increases the cost of essentials, and the things that make life worth living.

To give some context, what you could buy for £100 in 2019, will now cost you £125 just five years later.

You’re therefore being squeezed from both sides: less coming in and more going out.

Something has to give. 

Either some of the things that you enjoy doing, saving for the future, or both.

In doing so, means a lower standard of living and lower levels of financial security.

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Squeezed Middle - You're Not Alone

The first thing to make clear, is that if this applies to you, you’re not alone!

A quick Google search for "middle class saving families UK" reveals tonnes of articles of people's stories and others of data, reflecting the fact that this is a widespread issue. 

Added to this, analysis from the government’s OBR department shows we are collectively going through the biggest fall in living standards in 70 years (there’s a theme here), as shown in the chart below:

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What Can I Do?

Ok, I get it. 

It's not great. 

Tell me about the solutions…

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Review Your Spending

Never top of anyone's list for how to spend a few hours, but it's very revealing if you do, so make it the top of your list!

This process helps identify unnecessary spending and areas where you can cut back.

There are numerous tools and resources available online to assist with this. 

Start with your bank’s app or website. Most banks now categorise spending automatically.

If you’re still struggling to make sense of the figures, simplify things and go through each monthly spend and categorise it under two headings:

1. Essential

2. Non-Essential

Everything in category 1 needs to continue.

Everything in category 2, you should question how much value it brings you, and whether you should continue to spend on it.

What you'll find is that most things on direct debit are essential, apart from those pesky subscriptions which have embedded their way in our lives!

Most non-essential spending is more sporadic, like meals out and day trips.

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Making Tough Choices: Spending vs. Saving

In some instances, you may need to make difficult decisions about your lifestyle. This might mean choosing between having certain luxuries or doing fun things, and focusing on saving for the future.

While it’s important to enjoy life, finding a balance between spending on nice things and securing financial stability is essential.

If you’ve got little or no savings built up, this should be your priority, at the expense of some non-essentials, until you've got a buffer in place.

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The Psychological Benefits of Saving

It's not just your bank account that benefits from saving; your mental health does too.

Research (https://www.bbc.co.uk/news/articles/cy08nnxr14po) has shown that saving money can significantly reduce stress and improve sleep quality. 

Knowing that you have a financial cushion can provide peace of mind and a sense of security, which is invaluable during uncertain times.

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Focus on Increasing Income

Not as quick a fix, but just as important.

Can you increase your income?

Ways to do this:

• Seek a promotion

• Move jobs to an employer paying more for the same role

• Side hustles

• Freelance work
  

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This Won’t Last Forever

It's important to keep in mind that tough times, including periods of high inflation, are temporary. 

At global and national level, the economic picture is getting better.

Inflation is falling and returning to normal levels, and wage growth is catching up with inflation, having lagged over the last 5 years as a whole.

The government knows people can’t continue to be taxed at this level for the long-term. 

The indicators are all flashing green, it will just take a little time to feel for you and your bank account to feel it.

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If you'd like to talk to us about your situation to see if our Financial Planning service could help, you can book in a free initial consultation here:

https://calendly.com/labfp/intromeeting

Otherwise, see you next time.

Blue Zones - What are the secrets to a long, healthy and happy life?

At first, it might seem a bit odd for a financial planner to be writing about life expectancy and healthy lifestyle, but really it isn’t. 

Before diving into the article, will you allow me to clear up a common misconception?

Financial planners don’t actually want you to accumulate money for the sake of it. 

Instead, if they’re doing their job properly, they’ll help you spend your money on the things that bring you happiness.

Of course, happiness is essential for a long and healthy life. 

There is ample evidence that being stressed and unhappy leads to inflammation and disease. Therefore being happy and purposeful does the opposite.

Financial planners want happy clients, who are using their money as a tool to make their lives better.

So really, it’s not that odd at all.

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Blue Zones

With that out of the way, I’d like to share some learning I’ve found about ‘Blue Zones’.

Blue Zones are places in the world where residents have exceptionally long life expectancy compared with other people around the world. 

Residents in these areas typically live to 90 - 100.

Interestingly, these areas comprise not only the oldest groups of people on earth, but also the healthiest and happiest. 

They typically don’t take medication, nor develop cognitive decline conditions like Alzheimer's or Dementia. They also often work well into their 80’s.

There are 5 blue zones around the world: Okinawa prefecture (Japan), Sardinia (Italy), Nicoya Peninsula (Costa Rica), Icaria (Greece) and a Seventh-Day Adventist community in California (USA). 

The lifestyles of residents in these places all share ‘power 9 principles’, or common characteristics. These are: 

1. Plant-Based Diet

• Whole Foods: Diets are rich in vegetables, fruits, legumes, nuts, and whole grains.

• Limited Meat Consumption: Meat is eaten sparingly, often only a few times a month.

• Carbs: like pasta and some types of bread make up a large part of diets.

2. Regular Physical Activity

• Natural Movement: Daily activities involve regular, low-intensity physical activities like walking, gardening, and housework.

• No Structured Exercise: Physical activity is integrated into daily life rather than being a separate, structured activity.

3. Strong Social Connections

• Family and Community: Strong family ties and a sense of community provide emotional support and purpose.

• Social Engagement: Regular social interactions and maintaining a robust social network.

4. Purpose and Stress Management

• Sense of Purpose: Having a clear sense of purpose, which can add years to life expectancy. Research shows someone with clear purpose typically lives 8 years longer than a ‘rudder-less’ person.

• Stress Reduction: Regular routines for managing stress, such as prayer, meditation, naps, or socialising.

5. Moderate Alcohol Consumption

• Wine in Moderation: Some Blue Zone populations consume alcohol moderately, particularly red wine, often with meals and social gatherings.

6. Sufficient Rest

• Sleep and Rest: Prioritising adequate sleep and taking time to rest during the day, including naps.

7. Moderate Caloric Intake

• 80% Rule: Practices like "hara hachi bu" from Okinawa, which means eating until you are 80% full, help prevent over-eating.

• Front-loading caloric intake: Eating smaller meals, particularly in the evening, with higher calorie meals for breakfast and then tapering off throughout the day.

• Smaller daily eating windows: Eating the last meal of the day early enough to have a 14-hour fasting window before breakfast.

8. Spiritual or Religious Involvement

• Faith and Belief Systems: Many Blue Zone inhabitants participate in spiritual or religious practices, which contribute to a sense of community and purpose.

9. Environmental Factors

• Clean Environment: Living in areas with clean air and water.

• Agricultural Lifestyle: Proximity to nature and engaging in agricultural practices.

What does this have to do with financial planning?

Whilst the people living in these blue zones are typically healthy, they’re usually not wealthy, at least not in the conventional sense of being wealthy; how much money they have. 

They usually have more modest means and homes. 

But they’re happy and healthy because they have ‘enough’ and live richly in the other areas of their lives. 

This provides further proof that money does not necessarily equal happiness.

What can I do?

Our modern day UK society doesn’t really lend itself to providing many of these ‘power 9’ for us.

However, with the knowledge about how impactful these lifestyle factors are, you can be more intentional about how you live.

If you can incorporate some of the ‘power 9’ traits into your life, whilst balancing the demands of daily life, you’ll be acting in service of a longer and healthier life.

Sure, we can't all go and work in the garden all day harvesting tomatoes for a healthy and delicious pasta with our extended family in the evening, but we can make changes which have a similar impact. Such as buying organic ingredients and having quality time together at meal times at the table, instead of sitting on our devices or watching TV, for example.

After all, blue zone research found that only 20% of our longevity and healthiness can be attributed to genetics, the other 80% to the lifestyle choices we make.

I don’t know about you, but I find that pretty compelling evidence to think carefully about how I live my life!

If you are interested in learning more about Blue zones, you can go to the website dedicated to the research and its findings here:

https://www.bluezones.com/

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If you'd like to talk to us about your situation to see if our Financial Planning service could help, you can book in a free initial consultation here:

https://calendly.com/labfp/intromeeting

Otherwise, see you next time.

Property vs. Pensions

There is a reason Adrian Edmondson is pictured above, (sadly less so Rik Mayall). All will become clear below.

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Have you ever read the money sections of the newspapers at the weekend, particularly The Times, or Mail on Sunday?

There are a few versions of, essentially the same interview, floating around, in which a celebrity is asked about their money history and lessons learned. 

In it, they're always asked the question: "What's best for Retirement - Property or Pension?"

It's a fairly innocuous question on the face of it.

But really, it's not a great question, as you can hold a million and one different things in your pension. Of course, what the question really means is a pension holding typical pension funds. Usually stocks and shares, and perhaps some bonds in there, to reduce risk. Likewise, you can hold the types of funds held in pensions in other investments, like Stocks and Shares ISAs.

Anyway, I find these interviews fascinating, as the person being interviewed nearly always says property. 

It can be for any number of reasons, but this one from just a week ago is illuminating, and at the same time, pretty damning of the financial services world.

That is from an interview with Adrian Edmondson, of Bottom fame, in the Times. It saddens me as a fan of his, that he views financials services in this way, and he won't be the only one. 

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Three reasons property can be preferred over pensions

This, I think gives us an insight into one of the main reasons why a lot of people prefer 'property' to what I would call 'investments', which in this context are pensions and investment funds.

1) A lack of trust in the financial services world.

2) Can be from a preference for investing in something you can see with your own eyes. You can see, touch, and in some cases, smell (for better or worse) a property. 

As Adrian says "a house will still be a house after a financial crash", and investments are just numbers on a page. People, understandably, tend to have less of an emotional connection to the FTSE 100 over a house filled with many memories, or because it looks nice.

3) And probably most importantly, I would argue, is down to a lack of financial education. Not because pensions are necessarily difficult to understand. They aren't, but we're not taught proper financial education at school. Added to this we're a nation obsessed with property, as are our media, so you'd do well not to understand how property, as an investment, works.

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Lack of Education

I put out a poll on this topic on this platform, and by far, respondents said pensions are 'better' than property. It was around 65%/35% in favour of pensions. 

Yet, according to Pensions and Lifetime Savings Association, 69% of savers surveyed said they believe they lack, or are unsure of the skills they need, to choose where they should invest their pension¹. 

This speaks to a worrying lack of understanding of what pensions (investments) do, and can do for us, as a nation. It's no wonder then, that when people have built savings, or received an inheritance, perhaps in their 30's and 40's, and think of planning for their long-term financial future, that they consider this conundrum - "Do I get a buy-to-let, or do I Invest in my ISA/Pension?"

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So what performs better? Property vs. Pensions

Let's strip out the emotional factors, for a moment. You may have a natural preference for one or the other from personal experience, or remember what you were taught by parents growing up.

For now, let's just consider the cold, hard returns side of things. Most people who invest in either do so for a financial return, so that has to be the most important consideration at this point.

Schroders, the investment house, conducted research on returns of property in various parts of the UK, compared with investments in Global Equities, which are investments in stocks and shares around the world. Essentially, what most people have in their pensions.

They measured at the end of 2022, as to what £100,000 invested would have returned over the last 25 years². 

As you can see, 'pensions' (investments) easily provided the best returns over the last 25 years compared with the growth in property prices, turning your £100,000 into £631,000. 

Next best, was investing in property in London, turning your £100,000 into £580,000.

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Other Considerations over and above returns alone

Of course, choosing to invest in property or investment funds, or anything else for that matter, is not just about how the underlying assets performs.

From my perspective as a financial planner, here are some of the most important other considerations.

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Fees and Involvement

Rental income will increase returns from property compared with those shown above, this is true. But on the flip side, to obtain the property, you may have a mortgage, with added interest, which in turn reduces returns.

Some people like the idea of property as a 'passive income', but how passive is it really?

You'll have the hassle of 'managing' the property, be it admin, such as bills, or dealing with tenants and their needs. That doesn't sound that passive to me.

Otherwise, you get a property manager involved who can take anything up to 25% of your rent for their services, although it typically is less than this amount.

Pensions have management fees and this chart excludes those. These can typically be up to 1.5% a year, but with a workplace pension or personal pension could be much lower.

Because pensions are just numbers on a page, the only people you deal with are your pension provider or your financial planner, who looks after your investments/pensions for you. Because of this pensions (investment funds) are much more passive.

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Access

Property you can 'access' (sell) at any time, as long as you have a willing buyer, but this depends a lot on the property market at the time. 

Pensions, you can't touch until age 55, increasing to 57 in a few years' time. But other investments that work like pensions, and can hold the same funds in (such as global equities), you can access at any age.

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Tax

The tax regimes for the two approaches are vastly different as well. That would require its own article, and let's face of it, not many people want to read that. 

The current political environment has made it harder for property to generate returns after tax, like it did in the 90's and 2000's, and for most people it only really works well if you do it as a business, and not so much as a side-income. 

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In summary

If you simply want to go by which gives you a better return in the long-term, global equities has proven to do this, and Schroders found this was the case over any time period - 5, 10, 15, 20, 25 or 30 years. But, remember, past performance is no guide to future performance, etc. etc!

However, returns alone should not be the be-all and end-all in your thinking. 

More important should be the other factors I've mentioned. Consider what is likely to suit your lifestyle, how passive, or involved, do you want that income to be, and what suits your current and anticipated future tax situation, as this will have a big bearing on the effectiveness of either approach.

Essentially, both can work very well in the right circumstances, but there are trade-offs, and neither approach is without them.

You either need to work out which trade-offs you're comfortable with yourself, or find a professional who can help you do this.

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¹ PSLA Research Link

² If you want to read more, Schroders' data can be found here: https://www.schroders.com/en-gb/uk/individual/insights/what-174-years-of-data-tell-us-about-house-price-affordability-in-the-uk/

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If you'd like to talk to us about your situation to see if Financial Planning can help, you can book in an initial consultation here: https://calendly.com/labfp/intromeeting

Otherwise, see you next time.

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The information contained within this blog post should not be taken as financial advice, as it does not take account of personal circumstances, which would affect advice given. Should you wish to talk to us about personalised advice for you, we'd be happy to do so.