Knowing how to use your money can sometimes feel like a difficult task, but following these steps should help you towards a strong financial future.
Making small and important changes to the way you manage your finances are possible; you don’t need to be a money expert to succeed.
Make a plan
If you’re ready to sort out your money and start saving then it’s a good idea to think about what you’re saving towards, or what your financial goals are.
You may want to save for a holiday, a house or for retirement. Each of these goals will require a different approach in terms of length of time you need to save, whether you need to invest your money, and the best products to save into.
By identifying your goals, and you may have more than one, it allows you to save in the most efficient way and it also gives you accountability as you can check your savings progress.
Learn to budget
The more money you can save the better as you’ll be propelled towards your goals more quickly. This is where budgeting comes in.
As Charles Dickens’ character Mr Micawber said: “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.” In other words, don’t spend more than you earn. The key to this is sensible budgeting, making sure you have enough to cover your essential bills, some treats and put some money aside.
Before setting a budget do an audit of what’s coming in and out of your account. Although you may know the cost of your bills like Council Tax and rent or mortgage, lots of people don’t know how much they’re spending on day-to-day. A coffee here or a magazine there may not seem like a large sum of money but it all adds up. Work out how much you are spending and find areas where you can cut back, then give yourself a sensible budget for non-essentials like trips to the cinema (you’re budgeting, not living as a hermit!)
Get the best deal
Everyone likes a bargain, whether that’s picking up discounted items in the supermarket or a cheap budget airline flight. This attitude to bargains should be transferred over to budgeting and financial products too.
It’s easy to sign up with an energy provider or an insurer and forget about it but this could cost you a lot of money in the long term if there are better deals out there. Regular reviews of life, home and car insurance policies is a must; don’t just accept the renewal quote you receive from your existing provider. And regularly compare your energy tariff to ensure this bill is kept low.
The same goes for checking the savings rates you receive, especially if you’re keeping your money in your bank account. There’s the old statistical rumour that we’re more likely to divorce than switch banks but remember, your bank won’t reward your loyalty – they’re all about new customers.
And if you have a mortgage make sure you shop around for a new deal when your term is up rather than defaulting to the ‘standard variable rate’ offered by your mortgage provider, which are typically higher than you would find by remortgaging.
Pay down debt
Saving should be top of your financial priorities as long as you don’t have any unsecured debt to deal with first, such as credit cards or overdrafts.
There’s no point saving until you’ve cleared this debt as it’s unlikely that the rate you’ll receive on your savings will be higher than the cost of the interest on the debt. It’s best to start with a clean slate when it comes to saving so concentrate on becoming debt-free first.
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Mortgages are the biggest debt you’ll accrue and it’s unrealistic to think you’ll be able to pay it down in the short term unless you either have a tiny mortgage or you earn a fortune. This doesn’t mean you can’t overpay though and some people – myself included – like to overpay the mortgage as well as save. Overpaying a mortgage can have a significant impact on the length of time it takes to pay and the amount of interest paid.
A 3.5% mortgage of £150,000 paid over 25 years would cost you a total of £225,358 – meaning you pay £75,358 in interest. By overpaying £100 a month the mortgage would be paid off four years and four months earlier and you would save £14,396 in interest payments.
Have a buffer
Everyone should have the common financial goal of saving into an emergency fund. It’s widely accepted that you should aim to save at least three months’ worth of bills, and preferably six months. This means if you can’t work you’ll have enough money to ensure you can keep the roof over your head and pay the bills.
An emergency fund also provides security if those unexpected costs pop up such as a boiler breakdown or a car giving up on you. Without a savings buffer to rely on these emergencies have to be paid for via credit cards and loans which put you back to square one in terms of managing your money.
Think about the future
Once you’ve sorted your budget out, got your emergency fund in order, and maybe even set a short term financial goal, it’s time to start thinking about the longer term of retirement.
Not only do you get into the savings habit but you also have more time to accrue returns and ride out stock market troughs, which means you can take more risk with your money.
“If you save [into a pension] from a young age then the relative risk of investing in equity funds is much lower as you are further away from retirement,” he said. “You get more growth and the impact of compound growth over time means the returns accelerate on the money saved from an early stage.”
Patterson said paying more than the minimum required is a good habit to get into, as is putting a percentage of all salary increases straight into your pension, which he said ‘will make a big difference’ to your retirement.
In order to hit your longer term targets, you need to invest. Money left in cash, especially at the moment when savings rates are so low, is at risk of being eroded by inflation which means your money loses spending power over time.
Andrew Craig, founder of Plain English Finance, said for many people the stock market is ‘a big scary thing’ that people stay away from because they don’t understand it. However, investing directly in stocks and shares, or to make life easier, through funds. Craig said investors should make sure they don’t get ‘sucked into…a flavour of the month’ investment, which could cost them dearly. But even more importantly, they should ignore the noise around investing. He warned that individuals should drip feed money into investment funds monthly regardless of whether the stockmarket is up or down.