March is just around the corner and that means it is time for a little spring cleaning.
The term is thought to stem from the practice of dusting away soot from household surfaces that had accrued from coal-burning fires over winter. However, it can just as easily be applied to cleaning up our French finances.
We have just endured a long pandemic, which has made a mess of global supply chains and led to aggressive inflation that cannot be mitigated using the commonly used tools of government.
Traditionally, the answer has been to increase interest rates. However, prices are going up due to lack of supply to keep up with normal demand, not a sharp increase in demand.
If there is no rise in demand, then cutting demand by increasing interest rates does nothing to help. Rather, it can create even more problems for already struggling businesses.
If you’re a saver, this means any hope that rates will rise significantly and rapidly is unlikely.
At the time of writing, we also have the threat of a Russian invasion of Ukraine [UPDATE: on February 24, 2022 Russia started a military operation against Ukraine - The Connexion], causing instability in gas and oil supply – as if supply chains did not already have enough problems. Putin knows this and is banking on international appeasement, testing the resolve of the West in the eyes of China as well as Russia.
Of course, for many of us there is also the worry of fluctuating exchange rates as economics and politics have a knock-on effect on the value of our pensions and other income.
That is a lot of soot all over your finances caused by other people’s fires!
Many clients we talk to have an excellent understanding of what is going on globally, but struggle to interpret what it means for them personally and, more importantly, what they can do about it in practical terms.
If you spend in euros, think in euros
We come across many people who think very much in the currency of their old home, such as pound sterling.
Thinking in a currency that you do not live in creates risk. The credit crunch and Brexit have shown us just how much sterling can move versus the euro.
As a French resident, thinking in euros does not merely reduce the currency exchange risk, it eliminates it. If you can eliminate unnecessary risk, why not do so?
“But my pensions/rental income etc are in sterling,” I hear you cry.
This does not prevent sensible planning, using FX companies to maximise currency moves, maintaining your savings and investments in euros (which makes sense from a French tax perspective, by the way) and forward-planning your income requirements.
If you have rental property outside of France/the eurozone, challenge why this needs to be so.
If it is purely an investment, consider selling and creating more euro income. Do you have pensions that could be cashed in? For many pensions, this can be done, in France, with an effective tax rate of just 6.75%, so it is worth considering. Finally, could any of your income be turned to euro revenue?
The point of my words is merely to prompt a rethink. What was the right course of action then might not be right for your way of life now.
Hope for the best, plan for the worst
I am not generally a fan of such maxims, but when it comes to income planning, it makes sense. Good financial planning is not gambling, it is about creating as much certainty as possible.
If you are living in sterling, then ensure you have sufficient euros to see you through a crisis.
A crisis could be in exchange rates, the financial markets, a slowdown in the rental markets, or property prices. The point is to calculate how much income you might need for the next few years, ensuring that it is easily accessible.
A crisis, no matter what the source, should not cause you sleepless nights.
Do not just consider what you need at today’s prices, but build in inflation. In France, we have recently seen it soar to almost 3% from virtually nothing. Some economists believe inflation will drop as soon as supply lines are re-established.
While this is certainly possible, there is disagreement as to how quickly it can happen.
Plan for higher inflation, which means planning on requiring a rising income for the next few years, in the hope you do not ultimately need it.
Rethink your investment strategy
Interest rates at 0% mean that money is eroding in real terms, so a sensible investment strategy is crucial for your finances.
Simply keeping your money in the bank or under the mattress is unlikely to help.
The traditional market investment strategy of 60% of your capital in the markets and 40% in bonds is out of date.
The low yields on bonds mean that it will be much more challenging for investors to protect the real (after-inflation) value of their investments.
If you have buy-to-let properties, what happens when they are vacant and/or you need to sell when the market is bad? Property is not always ‘as safe as houses’.
With sensible financial planning, however, you can withstand almost anything the world might throw at you.
That is why a spring clean is a great way to prepare yourself for next winter, leaving you warm and cosy with nothing to do but relax and enjoy life, the world doing what it may!
Author: Robert Kent, Kentingtons.