Three simple steps before you invest

A large lump sum has just landed in your bank account - perhaps you’ve sold your practice or you’ve just inherited some money. You may be tempted to crack on with paying off your mortgage, or negotiate the best rate on an investment, or even splash out on that special gift you’ve been promising yourself. Thomas Dickson, Chartered Financial Planner at Wealthwide explains why having a plan is crucial.

Step 1 - Work out what you want

If you haven’t already done this, now is the time to figure out what kind of lifestyle you want from this point on. Ask yourself what you and your partner (if you have one) want to do between now and the day you die. What is it that you’ve always wanted to do or have in your life, but haven’t yet had a chance to pursue?

One of our client’s who’s recently sold her practice has dreamed of having a complete change of lifestyle and buying a house in the country with a big garden. I’m pleased to say she’s just had an offer accepted on her dream property. Some clients want to make sure they gift money to their children to start them off on the property ladder. Everyone’s aspirations for their future is different - the important thing is to identify what you want.

Step 2 - Crunching the Numbers

Next you need to add up what you’re worth; look at the likely inflows and costs to maintain the lifestyle you’re aiming for; throw in some assumptions about inflation, investment growth rates and how long you think you’re going to live. We call this creating a financial plan. If you’re good on spreadsheets, you might be able to create something yourself. If spreadsheets aren’t your thing, or you want to be confident that you’ll have enough money for this stage of your career and life, you may consider getting in touch with a professional financial planner who advises dentists. Find out more about Financial Planning here

Three reasons to create a plan:

1. You really don’t want to run out of money half way through your retirement. The fear of running out is a surprisingly common concern among principles I’ve spoken to. If you’re used to receiving a regular monthly income, the prospect of that coming to an end can be very disconcerting.

2. Most dentists we speak to, don’t want to die with too much money. What’s wrong with that you might ask? The first problem is your beneficiaries are going to pay a lot of inheritance tax, but worse you might get to your late 80s or 90s and realise there are things in life that you haven’t done, or things you’d have done sooner, or people you would have liked to spend more time with.

3. You’ve got enough money to last the rest of your life, but you don’t know for sure. And you spend your retirement years either feeling guilty for spending too much, or worried about spending money to the point that you don’t get out and do the things you really want to do.

Step 3 - Dividing your funds

Once you’ve figured this all out and decided what your lifestyle and financial priorities are, you’ll need to split the cash into short, medium and long-term and work out how much you need to allocate to fund each stage:

Short term – if you’ve just sold an asset like your practice goodwill or the freehold, you’ll probably need to set aside some cash for any capital gains tax liabilities; it’s also worth allocating some for doing the fun things you’ve already identified, or for example renovating your house, or buying a second home for personal use or an investment property.

Medium term - this tends to be the first 5-10 years after sale, before you start drawing a pension from your NHS, personal and state pensions. How much do you need to fund the lifestyle you’ve identified?

Longer-term - although your monthly expenses are likely to eventually reduce (for example if you downsize, stop driving or travelling abroad), it’s also important to factor in care costs which can be up to £2-3,000 a week.

There’s lots you need to get right to invest successfully, such as understanding your attitude to investment risk, picking the right investment provider and ensuring you keep investment costs low. However, if you want to have a really good investment experience, I’d highly recommend completing the above three steps before investing any capital. If you’re interested in reading more about how to have a successful investment experience – click here or you can watch Thomas’ guide on the 7 ways to make the most of your investments here