When I ask people what they think of when it comes to Personal Finance, three words typically come to mind – budgeting, tax and pension. They know it’s important. They usually have several examples of someone who did not make the right decisions when they were younger. So naturally I have a follow up question.
What are you doing about your financial situation?
A typical response comes in three phases:
- A look of panic
- Then a dismissive comment such as “I have time to look at that later“
- Glossy eyes in the face of anything else said after that, as they plan their exit
I am not sure if it is finance trauma or anxiety, but it seems that talking about money has become taboo and who can blame us, with all the jargon and unnecessary complexity.
The reality is we have gone from a world of general job security and defined benefit pensions. To a world of rapidly changing roles and pension option liberalisation. Meaning the baby boomers do not typically have the skill set of financial planning to pass on. This combined with the expectation of government support and who can blame them, when the retirement age of 65 was first set, the average life expectancy was 62. Personally I think it is great, I can be more in control of my future, I can expect a longer more enjoyable retirement, provided I make the right decisions now.
To be clear, this is not a budget, this is a spending plan. Budgeting seldom works, it is too hard for most people. This post is not for people who can instantly say what their bank balance is to a penny. This is for people who want the feeling of security, without the stress and focus needed to budget. As with everything financial, this is a guideline for things to consider, your circumstances may mean it doesn’t work for you. But my goal is to increase Financial Literacy Education and discussion and we have to start somewhere. Perhaps more simply reduce the anxiety felt.
Grab a piece of paper or use the worksheet download.
STEP 1 – Understand what you are dealing with
First thing you need to do is actually understand the current situation, by collecting the following information:
- A couple of bank statements
- A recent payslip
- Work pension details
- Other loans etc.
STEPS 2 & 3 – Income and Deductions
Write down how much you earn (before tax), then your payslip deductions. Check that against your income that arrives in your bank account.
STEP 4 – Spending and Savings
Write down your big bucket expenditure that is fixed (or near enough such as transport) each month. Then include some of your flexible expenditure, this includes regular (food) and irregular (going out). Look for opportunities to optimise spending such as reduce mobile plan or gym membership (or increase for better value).
Work out how much you need to save for a specific (target) goal, such as a deposit or a holiday.
STEP 5 – Debt
Inventory your debt to make sure you are paying off enough. Debt steals your future. If debt is a significant issue, consider getting support right now. Otherwise commit to not getting in to debt to fund your lifestyle.
The two most well know methods are the snowball and the avalanche method. The snowball method involves paying off the smallest amounts first. The avalanche method involves paying off the highest interest rates first, while paying off the minimum amount on the other debts. The avalanche method will allow you to pay less overall and paying off your debt quicker.
Consider consolidating debts to make it more manageable and save you money.
STEP 6 – Investments
Investing now is absolutely crucial because of the effect of compound interest. There is a lot to cover in investing and too much to be covered as a segment of one post. But simply assuming 7% return, every 10 years you wait, you literally halve your retirement pot.
Basically the plan that is most likely to work for most people is to invest in diversified passive index funds such as Vanguard or Fidelity provide. Alternatively look at a digital investment provider (my current favourite is Scalable Capital, but check out our recommended page).
Simplified Investment Plan
- Invest through pension and ISA (tax efficient)
- Invest in passive index funds across asset classes (fee efficient and diversified)
- Start NOW!
STEP 7 – The Plan
Review the plan and automate everything! Take the decision out of it. If you are like me £200 can get blown in a week-end, but £20 can last two weeks if need be (Parkinson’s Law). So debt payments, fixed expenditure, investments, have them all set to go straight after you get get paid.
This is a quick introduction and has not given each area the attention they deserve, but my hope is that it will start you on the journey to becoming more comfortable with financial literacy, reduce anxiety and fast track to success.