It’s far easier to take control of your money than we’ve been led to believe – you just need a plan and some time
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From managing unexpected bills to how best to handle getting a raise at work, getting to grips with your money is key to financial security.
A person’s financial picture is rarely smooth for long and having knowledge of how the basics work this Financial Awareness Day on August 14 can really raise the game for your wealth.
It’s important to remember that if you don’t know about a particular area or are struggling with your money situation, there is plenty of help including StepChange for debt and the Just Finance Foundation, which aims to improve overall literacy.
But for the most part, people may struggle with finance simply because we’re rarely given the tools to succeed to start with – from young ages in education, or later on with how to deal with topics like investing or understanding areas that affect how much we can buy with our money.
“Financial Awareness Day isn’t about shaming people for short-term budget struggles or forcing anyone to sit through an overwhelming maths test. It’s about taking back control of your own future,” says Susan Hope, Retirement Expert at Scottish Widows.
So how do you take back control, and master the basics of personal finance?
To get a better understanding of how your finances work, you have to break money down into different areas.
“Start off by understanding the basics of saving, budgeting, investing, and retirement planning,” suggests Ms Hope.
First among those has to come budgeting – it’s what sets the allowance for everything else.
To budget effectively, it’s important to know exactly how much you’ve got coming in, whether that’s from a salary, benefit allowances, pocket money, side-hustle earnings or later-life income like dividends, rental or pension income.
From that starting point, you can then work out not only what you’re spending, but break that down into different areas: needs and wants, for example, or whether you want to monitor your spending across different time periods.
Get a free fractional share worth up to £100.Capital at risk.
Get a free fractional share worth up to £100.Capital at risk.
“Think about how to make budget tracking work for you. Do you want to have a weekly limit, or a monthly one? Would you want to allocate a certain amount for different uses, like eating out or shopping? This will help you figure out where your money is going, and whether you need to make any changes to cut costs,” explains Duncan Fortune, head of commercial at Tesco Bank.
There’s no one single correct way to budget – check out some common approaches and see what works best for your lifestyle and your ability to stick to it.
Any good budget should allow you some spending money. What’s life without some enjoyment?
But it should also contain at least some cash which is diverted towards your savings. There are three main types to think about.
First, building your all-important initial emergency savings fund, which you turn to in the event of an unexpected bill for something you need right away. Then, savings for any specific goals you have in mind – for Christmas presents later in the year perhaps, or a holiday with friends. Lastly, longer-term savings, which might include a house deposit, or something else big.
Keep savings separate from everyday money, and most people now even keep individual savings pots separate from each other – so when you go to book that holiday, you know exactly how much you can spend on it, for example.
A final important note: make sure your savings are earning a good interest rate – that’s what helps it grow.
A slight change of pace now, with things to know rather than things to do – but understanding compounding and inflation will not only make your financial life easier over the long term, it will put you well ahead of the national average according to most money literacy research.
Compounding is essentially earning more money on the money you’ve already earned.
So, if you have £1,000 in savings and earn 4 per cent interest, you’ll earn £40 over the year. If you repeat it the following year, you’ll earn 4 per cent on £1,040, which is £41.60. In other words, you’ve received an extra £1.60 by earning interest on your interest, not on any extra money you’ve contributed. This is compounding in action.
It looks small on this scale, almost irrelevant – but over years and decades, it’s the single most powerful tool at your disposal with money. Learn how to maximise it to your benefit.
As for inflation, it’s almost the opposite: how your buying power with money is eroded year after year by rising prices.
What affects inflation is a whole topic of its own, but for how to beat it, make sure your savings interest rate is above the rate of inflation – that’s then called growing your cash in real terms.
Research from LV shows nearly half (45 per cent) of UK adults are not confident they’ll be financially better off in five years’ time.
Get the above in order – budgeting, saving and knowing what helps your money grow – and you are already winning. Use them to stay in control of your finances with an occasional check-in, and you should be confident you’ll be able to improve your own situation materially.
But for the longer term, there are two different ways to ensure you have even more financial resilience: investing and pensions (pensions generally are invested, but let’s leave that aside for now!).
If you have built up your savings and still have some spare money you won’t need for at least three years (but ideally much longer), you could consider investing some. Over the long term, investing tends to give much better returns than saving alone does, as stock markets for example can grow by higher rates than banks usually offer in interest rates.
Do your investing in an ISA and any growth or dividend payments are tax free, and you can sell investments to access the funds along the way should you need to.
Pension contributions are clearly different – you can’t access it until retirement age, but that doesn’t mean it’s gone. In fact, due to the effects of compounding, it’s one of the best ways to build funds for your retirement.
You can do it yourself in a SIPP, have a company manage your personal pension, build up your state pension and pay a small portion of your salary into a workplace pension, with your employer often contributing more on top.
If you are employed, check if your employer offers to match your own contributions – if so that’s effectively free money. And if times are tight, lowering pension payments briefly rather than stopping them can make a great difference in the long run.
“If you’re facing financial difficulties, consider reducing your contributions rather than stopping them altogether – even small contributions are better than none, and you’ll still benefit from your employer’s contributions,” says Ms Hope. “Don’t miss out on the ‘free money’ that your company adds to your pot!”
Pension and investment planning sometimes turns people off because they think they need a large amount of money to get started, but most places now let you start with as little as £25 or £100.
Build up your pile month by month, small amounts at a time if necessary, and you’ll be adding serious layers of improvement to your overall financial picture.
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
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