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Why DIY finance can be dangerous

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On 19 November 2012


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It's all too easy to make mistakes if you make all your financial decisions on your own.


I’m sure that many Lovemoney readers always make their big financial decisions on their own. And no doubt a fair proportion of those readers make good financial decisions.

But adopting a DIY approach does have its risks. Here’s a look at some of the things that could go wrong if you never see a financial adviser:

1. You’ll spend more than you earn

Spending more than you earn is the first step on the road to financial disaster. If you keep on spending more than you should, your debt will grow every month and your interest bill could spiral out of control.

An adviser can help you draw up a realistic budget that will help you keep your spending under control. If you follow a DIY approach, I think you’re more likely to go seriously into the red.

2. You’ll have a rotten retirement

Life expectancy is getting longer all the time and you can no longer rely on the Government to look after you in your old age.

You may think you don’t have a problem on this front because your employer operates a pension scheme. But these days many employer schemes aren’t that generous, and you can’t be sure that you’ll have enough money to lead a reasonably comfortable lifestyle in retirement.

An adviser can give you a rough estimate of what your retirement income will be if nothing changes, and he can show you what steps you could take to boost your pension.

3. You’ll take too much risk

If you decide to invest in the stock market, it’s all too easy to be tempted by lots of high-risk companies that could potentially deliver big rewards.

For example, you might be tempted by a gold company that isn’t producing any gold, but is exploring for big new deposits in Africa. But if the exploration company never finds gold, you could end up losing all of your investment.

If you go to an adviser and ask for a check-up, he’ll look at all your investments with you. If you’re taking too much risk, he’ll flag that up, and you can then take appropriate action. (It’s possible that the financial adviser will refer you to a specialist investment adviser to review your investments, but the effect is still the same.)

4. You’ll focus on one asset class

If you’re investing for the long-term, it makes sense to spread your money around. Invest in different stock markets around the world, buy some bonds, keep some cash in a savings account, and get some exposure to the property market.

However, some DIY investors load up one particular asset class or even just one particular asset – a buy-to-let flat for example.

Buy-to-let investors have made plenty of profit over the last 20 years, but that doesn’t mean they’ll necessarily do as well over the next 20 years. In fact, investing in just one asset class (residential property in this example) could be disastrous.

Financial advisers would advise most people to spread their money around – follow their advice.

5. You’ll pay too much tax

We all want to pay less tax – in theory. But, in practice, lots of people are paying more tax than they need to. A good adviser could help you cut your tax bill.

6. Your children could suffer

If you don’t see an adviser, you may have less money to spend on your children. Not just when they’re young but also when they may need help to buy a home or cope with university costs.

What’s more, financial planning can boost the amount your kids inherit when you die. Inheritance tax kicks in if an estate is bigger than £325,000 – or £650,000 for a couple – but sensible planning could help you to avoid paying this tax.

7. You won’t be able to cope if you’re ill or you lose your job

At Lovemoney we believe that all adults should try to build a savings cushion. Ideally this cushion should be as large as six months’ salary. With this cushion, you’ll find things much easier if you’re hit by bad luck – perhaps poor health or losing your job.

If you don’t see a financial adviser, you might not make the effort to build such a cushion.

What’s more, an adviser can ensure that you at least consider taking out critical illness cover or income protection insurance. These insurances will pay out if you’re not able to work due to poor health. An adviser can help you choose the best policy for you and also look at whether you need to buy life insurance.

If you’d like to find out more about seeing an adviser, check out our Lovemoney video: Should you go to a financial adviser?

More on financial advice:

Eight weeks until the advice revolution!

When should you get financial advice?

Ten questions you should ask a financial planner

How to find the best adviser

Bureaucrats get it right for once!

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