Three financial rules to live by in 2025

Putting financial plans in place can take some time and thought, but as much as anything it’s about adopting good habits. Here’s three guiding principles for those getting started – by Rob Morgan, Chief Investment Analyst at Charles Stanley

1. Plan like a pessimist, invest like an optimist

 
The foundation of any sound financial plan is resilience. Keep an emergency fund that can be drawn upon for urgent repairs or bills. Take out appropriate insurances (if you don’t already have them at work) to cater for worst case scenarios. Especially if you have a family who rely on you. Keep mortgage debt under control, and most definitely pay off any expensive debt as a priority.

When thinking about all this it pays to be a pessimist. Play through negative scenarios and consider how they might affect your finances. That way you’ll be as sure as you can be that you are ready for what life might throw at you, and you’ll be on a strong footing to build long term wealth. You can’t build the house without the proper foundations in place!

But once you have this robust position and you have thought about what might go wrong then it’s time to adopt a different, more positive mindset to maximise long term returns.

Taking too little investment risk early in life when your investment horizon is measured in decades rather than years can be a wasted opportunity. Cash typically does little more than keep up with inflation, so it’s important to consider more risky but potentially more rewarding assets.

This means being strong-stomached enough to tolerate your investments falling as well as rising in value. However, stock market drops tend to pale into insignificance when you zoom out to look at the bigger picture. Make sure you harness the wealth creation from growing companies early in life, but without taking undue risks such as not being sufficiently diversified. If you keep adding to your investments, you’ll be buying in some of the dips too, which can help in the long run.
 

2. Know when to take advice

 
Taking professional financial advice is very personal and can depend on who you are and the situation you are in.

If your needs are very simple, say you want to invest a modest amount of money away each month tax efficiently, then it’s unlikely you need full financial advice. Some reading on investment funds and on ISAs and pensions should set you well on your way. If you need a sounding board or some reassurance then consider speaking to a qualified financial coach who can answer your questions without recommending a particular course of action.

In other cases, there are people with complex situations, large portfolios, or both, who really ought to take advice – but don’t. They insist on going it alone, which can be a false economy.

A critical point often comes during the transition into retirement, with people starting to draw on their assets rather than build them up. Up until then it’s been a case of them methodically investing, primarily through tax efficient pensions and ISAs, and perhaps taking a straightforward, ‘set and forget’ investment approach. But there are all kinds of different strategies and tax considerations when it comes to planning retirement income. Financial advice at this time can add significant value, not least because many decisions are irreversible, and mistakes costly.

With so much at stake, everyone should consider a financial ‘MOT’ as they approach retirement, and for any complex areas regulated financial advice is likely to be well worth the money.
 

3. Spend money on what you care about, but never waste it

 
In some ways I do admire the so-called ‘FIRE’ movement. It stands for ‘Financial Independence, Retire Early’ with adopters frugally living off a small proportion of their income, investing the remainder with the goal of ending their working lives early – in their 40s say.

Fire advocates have shone a light on what is possible with some thrift and simple index investing. Adopting the general principles of FIRE makes sense and could cut years off your expected retirement age. But for most people it’s just not realistic if it means obsessively cutting back on all or most of life’s pleasures. You won’t be able to relive your 20s and 30s in later decades, so it’s important to make the most of your fitness and health and do things that make you happy. Create a household budget to help plan your spending – but don’t forget to factor in some treats!

It’s also the case that FIRE isn’t even an option for lots of people. Household bills and expenses have climbed rapidly in recent years and can be barely enough for any saving, let alone an extreme amount.

The antithesis of FIRE is wasteful spending. It’s important to enjoy life and spend money on what you care about beyond the everyday essentials. But living beyond your means or needlessly overspending on a regular basis is a recipe for disaster. Sadly, it is all too easy with the consumerism of the modern world, but life is all about striking the right balance between living for the moment and preparing for the future.