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Embrace Your Financial Wellbeing

Taking control of your financial wellbeing is a positive step, but it is often an area that is neglected or set to one side. 47% of people do not feel confident making decisions about financial products and services[1], and with so much information available, it can feel hard to know where to begin.

If you are just starting out with your finances, there are many steps you can take on your own to build a solid foundation for your finances.  Here are our handy hints for setting yourself up for success.

1. Consider your goals and timescales

For shorter term objectives (those which are likely to happen within the next one to five years), it may be too risky to invest your money, so searching the market for competitive fixed interest rates is a good alternative while still providing some opportunities for your money to grow, though it is important to be aware of any penalties for early access. Cash ISAs would allow you to do this tax-free             

By identifying your short, medium, and long-term goals, it becomes so much easier to work backwards and define the path towards achieving them. Your goals could be anything from a home purchase through to early retirement, but ensuring your goals are specific and quantifiable will help you to visualise the route to success.

The long term is just as important as the short term. Would you like to invest?  Putting your money to work over a longer timeframe (such as 5 to years, or more) provides more options for your money to grow, but it comes with risk. 

Investing can seem a scary thought when you have little to no experience, but almost all of us will have some form of investment, as your pension is likely to be invested in a range of funds and will therefore have an element of risk attached. 

When considering investments, it is important to remember the power of compounding – where you reinvest any gains made on the original sum back into the fund which allows this to continue to grow and accumulate over time. This means that by investing (through your pension, a stocks and shares ISA, or another investment type), not only are you making money from the initial sum, but you are also benefitting from incremental increases through the cycle of growth and reinvestment.

It is always worth remembering that investments are not guaranteed and values are subject to fluctuation in line with market performance, and should be considered only when the funds are not needed for a long period – several years or more.

Top Tip- Split your goals into short, medium and long-term objectives to help provide you with a designated timeframe and break down the smaller steps needed to achieve them.

2. Set a realistic budget

Accuracy and honesty is key when setting a budget, as it is easy to overlook one-off expenses such as car insurance, Christmas presents and holidays, all of which can really throw a budget into disarray. There are many tools available online to help you understand your budget, and with an increase in online banking and all its functions, many apps can show you trends in your spending. This helps to build an accurate picture of your income and outgoings.

As a starting point, look to understand your household income in full, including any pension contributions you make (including through salary sacrifice). Make a list of your regular outgoings, prioritising your household bills and groceries; this should be considered your ‘core’ expenditure.

Then, you can be realistic about how much you want to save. Savings should include shorter-term savings for emergencies, as well as longer term investments such as house funds and retirement planning. Finally, you are left with your discretionary expenditure, your ‘fun fund’ to do with what you like throughout the month. You may wish to consider setting some of this aside on a regular basis to pay for the large one-off expenses such as holidays, too.

A good rule of thumb when considering your budget, is the 50/30/20 rule: paying 50% of your income going towards your needs, 30% to your wants and 20% to your savings. It is not an exact science, but may help kick-start the process for better budgeting. 

Top Tip – If you have any debt (non-mortgage), this should be paid off from the 20%, paying down the most expensive debt first before moving onto the next.

Top Tip– If you are reviewing your budget for the first time, look at your direct debits, too. Often, you will find better deals on the market, and you may even find some subscriptions which can be cancelled, saving you money in the long run.

Top Tip- If you are making a pension contribution to your employer’s pension scheme, use an online budgeting tool to see the impact of increasing your contributions by a % or two. Often, it won’t significantly impact your bottom line each month, but it can make a considerable difference to your pension pot over time!

3. Build your emergency fund

An emergency fund (also known as a rainy day or contingency fund) is a pot of money that is easily accessible for you and your family, acting like a financial shock absorber for any short term ‘emergencies’ (think about the boiler breaking down, or an MOT failure). When considering your fund, you should also think about what you would do if you were unable to earn your usual income – for example, through ill health or job loss. These often-unexpected events can have more severe consequences without a suitable emergency fund in place, and can quickly put you on the back foot in terms of your financial wellbeing.

There is no hard and fast rule on how big an emergency fund should be, and it really comes down to your individual comfort level. It is important to remember that while having easily accessible funds is important, inflation can mean that excess cash held in the bank loses its ‘real value’ over time, so consider the most appropriate amount for you.

Top Tip- Try to make a note of any ‘unexpected costs’ incurred over the last few years. This can help direct your thinking on what amount would be the most suitable emergency fund for you.

4. Protect yourself for your future

Financial protection is the foundation on which any strong financial plan is built upon, and no plan would be complete without considering how resilient it is to when things go wrong.

It is important to start by taking stock of what you have available to you: do you have life cover or income protection available through your employer, or connected to your mortgage?

It is then important to consider how you and your family might be impacted if you or your partner were unable to work or were to be diagnosed with a critical illness or pass away. Would you have enough  income to keep your  goals on track, to repay any debts, and to maintain your  standard of living?

While you might already have some protection and insurance in place, it may not be enough, and should be regularly reviewed, particularly in light of any life events such as a change in job, a house move, or children.

Keep any legal aspects up to date, especially wills and pensions nominations, as these are important for protecting your financial future. While we may not want to consider the implications of us or a family member passing away, or losing capacity, the knock-on impact can be costly and time consuming, and often lead to a different outcome than you might have wished.

Top Tip- Look at your employer benefits. Many employers offer sick pay and death in service cover as standard, but often there will be an ability to increase your cover at a favourable rate. Be aware though of what might happen to that protection should you leave your employer.

Where can I go for more information?

If you’re at the early stages of building your finances and would like to be more financially aware, we highly recommend the free MoneyHelper service, which provides a range of information and tools online to help build your financial knowledge  (www.moneyhelper.org.uk)

What next?

Once you have the basics covered –everyday debt has been paid off and you have built your cash savings and a moderate pension pot (there is no minimum, but usually around £50,000 or more is a good point) – it is worthwhile contacting a financial advisor, to help you to focus your goals and create a comprehensive financial plan for the future. 

We are delighted to help. Please contact us for a complimentary conversation about moving your finances to the next level, and how we can help.


[1] Money & Pension Service, Financial Capability of UK Adults, Key statistics on UK financial wellbeing, numeracy and – FinCap

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