Why an effective financial plan might involve spending more

When people think about financial wellbeing, they often link it to frugality or building wealth. Yet, an effective financial plan isn’t always about that, sometimes, it might make sense to spend more.

It can be difficult to get your head around. After all, as a child you’re often taught that being sensible with money means putting it in a savings account rather than spending it. Yet, this approach only focuses on growing your wealth, rather than using it in a way that helps you reach your goals.

So, here are three scenarios where your financial plan might involve increasing your outgoings.

Spending more could help you reach lifestyle goals

At the heart of your financial plan should be your lifestyle goals – how do you want to use your time and what makes you happy?

To reach these goals, you might need to spend more. Perhaps you enjoy getting creative and want to attend regular art classes, or maybe you love to attend gigs across the country so want to boost your disposable income to see more of your favourite bands.

Of course, simply increasing your spending could lead to a shortfall later in life. This is why making it part of an effective financial plan is important.

Working with a financial planner could help you assess how the decisions you make today, including spending more to reach your lifestyle goals, could affect your future income.

You might find that you’re in a position to boost your disposable income to spend more on the things you enjoy.

If spending more to reach lifestylegoals could affect your long-term security, a financial plan may help youassess where compromises might be made so you can strike the right balancebetween enjoying your life now and being secure in the future.

Higher outgoings now could boost yourfuture income

There might be times when spendingmore money now could boost your finances in the long run.

For instance, if you’re thinkingabout returning to education to pursue a career change, you might need to fundthe costs yourself. Or, if you’re an aspiring entrepreneur, you may choose toincrease spending to get your idea off the ground.

In both of these scenarios, you mighthope that the initial outgoing will lead to a higher income and greaterfinancial security in the future.

Making this decision part of yourfinancial plan could help you assess if it’s the right option for you andunderstand the potential short- and long-term implications it may have on yourfinances.

You want to create a legacy duringyour lifetime

Often, when people speak of a legacy,it’s what they’ll leave behind when they pass away, but it might also besomething you do during your lifetime. Indeed, there could be benefits tocreating a living legacy.

Your loved ones might have a greaterneed for financial support now than they will in the future. For example, ahelping hand to purchase a home when they want to start a family could mean bemore useful in terms of creating long-term financial security than aninheritance later in life.

Alternatively, you might want toleave a legacy to a charitable cause during your lifetime.

Again, a benefit is that you have thepotential to see the impact your gift will have. You might choose to support the charity in other ways too, such as acting as a trustee or organising afundraiser.

If your estate could be liable for Inheritance Tax (IHT), creating a living legacy might be one way to reduce the potential bill. As well as reducing the value of your estate through gifting, if you leave more than 10% of your entire estate to charitable causes on your death, the IHT rate your estate is liable for would fall from 40% to 36%.

When gifting to reduce IHT, it’s important to note that not all gifts are immediately outside of your estate for IHT purposes. Indeed, some may be included in calculations for up to seven years after they were gifted. If you’d like to discuss how to pass on wealth tax-efficiently, please get in touch.

Contact us to talk about your financial plan

If you’d like to create a financial plan that’s tailored to your goals and circumstances, please get in touch. We could help you balance short-term spending with long-term aspirations so you can have confidence in your future.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate tax planning or estate planning.

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