Before you start making grand plans for the future, or worrying about the complexities of investing, here are the key things to consider.
Many people dive straight in at the deep end when it comes to financial planning causing them to feel overwhelmed, in turn leading them to avoid it altogether. Being constantly bombarded with advertisements for different financial products can mean it’s hard to know what’s right for you.
So here are a few simple steps to help you start managing your finances
1. Deal with your debts
If you’re paying more interest on debts than you’re earning on savings and investments, you’re losing money. In this case it may therefore make sense to withdraw cash and pay off as much debt as possible. There are exceptions to this very general rule – for example, you may want to keep a balance on a credit card to take advantage of a 0% deal, or keep your Student Loan running because it offers generous terms. But generally speaking it makes sense to try to clear your debts before you start trying to grow your wealth.
2. Spend within your means
It sounds obvious but do you know for certain whether you’re spending less than you earn in take-home pay? If not, make budgeting a priority. There’s ultimately only one way to grow your wealth and that’s to spend less than you earn. So build a detailed list of your essential outgoings and see if you can limit them. There are numerous online tools that can help you here, including the many helpful calculators available via the UK government’s Money Advice Service.
3. Build an emergency savings fund
Before working on any other financial goals, it’s a good idea to build up enough savings to cover at least three months of expenses in a cash savings account. This will ensure you can make ends meet (at least for a while) should you suddenly lose your job or become unable to work because of illness. It’s especially important if you have a mortgage, because missing multiple payments on that could put your home at risk of repossession.
The suggestion that you need enough for three months is just a rule of thumb, but it’s based on a couple of important facts: (1) many insurance policies related to illness take time to come into effect once you’ve gone off work, and (2) it can sometimes take months to access other sources of cash, such as deposit accounts or further borrowing.
4. Take advantage of entitlements
If you’re not using all the tax allowances available to you then you’re effectively throwing money down the drain. One of the simplest ways to start sheltering both cash and investments from tax is by opening an Individual Savings Account (ISA), so if you have enough surplus income to start building up a nest egg then you should put this type of account at the top of your list for consideration.
You may also wish to start putting money into a pension – especially if your employer will match your contributions. Both types of account are subject to annual allowances, but until you’ve used up all those allowances you’d be foolish to invest by any other means.
5. Protect yourself from disasters
The best financial plan will count for nothing if you can’t work for the long term because you’re seriously ill, or because you die before your time. So you need to make sure your family has a safety net. Fortunately, it’s easy to put one in place with insurance. You just need to work out which type is right for you, and how much cover you need.
6. Identify specific goals
Don’t just aim to ‘become as wealthy as possible’. This could encourage you to take too much risk, and it’ll make it more difficult for you to ensure that the money you actually need at specific points in your life is available at the right times. Instead, think in terms of life goals such as buying your first property or retiring.
Your plans will inevitably change as you grow older, but by thinking big periodically, you should find you only need to correct your course every now and again, rather than having to make big changes.
7. Consider professional advice
All financial advisers take their clients through the above steps before helping them to get a grip on their finances and build long-term strategies. They’re the best-placed experts to ensure you don’t forget important precautions, miss opportunities to save money or head off in the wrong direction in pursuit of your goals.