As wealth management specialists, we are often asked ‘Where and how do I start with my money?’ or told ‘I never seem to have money when I need it’. Understanding how to hold and manage our hard-earned wealth is key to ensuring that we always have funds to hand when we need them.
Understanding the basics of money management is the key to finding financial freedom. Broadly speaking, our funds fall into three main categories:
- Short-term, hands-on money required for day-to-day expenses
- An easily accessible ‘rainy day’ fund to cover unforeseen expenses, or nice-to-have things like holidays
- Long-term investments for life events, for example saving for retirement, buying a house or paying for a child’s wedding
So, if you would like to manage your money better, read on to find out our 10 top tips for efficient money management.
1. Have a financial plan
Let’s consider the three categories of funds outlined above. Without a financial plan, how will you know how much you need in your current account to cover daily living expenses, how much you can afford to save or invest, or how much you can afford to pay towards your pension each month?
Common components of a financial plan will include:
- Financial goals and objectives – where do you want to be in X years’ time?
- Income and outgoings – what are you bringing in and paying out? How much can you afford to spend without running out of money?
- Protection needs – have you planned for life’s unexpected events, such as losing your job or being too ill to work for more than a few months?
- Savings & investments – how much of your money do you have in savings accounts and investment portfolios? Are your savings and investments still offering strong returns? What changes might need to be made?
- Retirement – are you currently saving enough for retirement?
- Issues and problems – are there any weaknesses or problems that could affect your financial situation? How might these be rectified?
2. Draw up a budget
If you’re continually running out of money before payday, a budget is the answer. Starting with your take-home income, first list the bare essentials – i.e., what must be paid out to keep your family sheltered, fed and warm – before moving onto those outgoings that are not so strictly necessary. In order of priority, these are the typical outgoings that feature on most budgets:
- Housing costs – such as your rent or mortgage, bills and home insurance
- Groceries – how much do you need to feed your family each month?
- Other essential outgoings – such as shoes and clothing, school uniform, car insurance and road tax, commuting costs, paying off debt, etc.
- Savings – once you have prioritised your essential expenses, it is important to budget for savings, such as your emergency savings fund and pension contributions, before you budget for other daily expenses
- ‘Nice-to-haves’ – this category can include expenses such as eating out, leisure activities, hobbies or holidays
3. Focus on paying off debt
Nothing can derail your finances faster than the accumulation of high-interest debt, for example on credit or store cards. If you do use a credit card, it is important to prioritise paying it off on time to avoid the type of spiralling debt that can seriously harm your credit score.
To avoid debt, stick closely to your budget. If your budget says you don’t have the money to buy something this month, don’t use your credit card to do so. The repayments will eat into next month’s money and make it increasingly difficult to stay on track.
4. Save for the future
It’s important to set aside any savings before moving on to non-essential expenses. To help you prioritise your savings, think about what would happen if you were faced with an unforeseen expense. Could you afford to pay out for a new boiler if yours broke down? Or a large veterinary bill? What if you lost your job? A general rule of thumb is to try to build up three months’ worth of essential outgoings in an instant access savings account for emergencies.
However, instant access accounts typically offer lower interest rates, meaning that the return on your money will be minimal. If you already have sufficient emergency savings, it may be worth putting further savings away in a fixed-term savings account, which offer higher interest in exchange with locking your money away for a set period, or looking into investment.
5. Invest for higher returns
With interest rates at rock bottom, savings accounts are offering minimal interest on savers’ hard-earned cash. Investing is a way of getting higher returns, in exchange for a certain level of risk. Stock markets can go up and down, so your investments can fall as well as rise; however, a financial adviser can assist you in building an investment portfolio that reflects your personal risk profile. This means that you can choose the level of risk you want to accept (although lower risk often means lower returns).
6. Protect your loved ones
According to Royal London just two in five people say they’d be able to cope for more than three months if they lost their income. If your situation is similar, then it’s important to put in place protection policies, such as life insurance (which pays out a lump sum to your family if you die), critical illness cover (which pays out if you develop a serious or terminal illness) or income protection insurance (which pays a percentage of your monthly income if you are too unwell to work), to safeguard your loved ones against unexpected financial blows.
7. Start contributing to your pension as soon as you start work
When you start work in your late teens or early 20s, retirement seems, well, a lifetime away. But with living expenses rising and even the full State Pension inadequate to fund a comfortable retirement, the sooner you start saving, the more opportunity your investments will have to grow.
According to research, savers on average earnings will need to build a pension pot of at least £300,000 to retire well – and this is likely to increase in the future. With all employers now obliged to offer a workplace pension under the auto-enrolment scheme and to make contributions for all employees, it’s never been easier to start saving. Your own contributions will be taken out of your salary along with tax and national insurance contributions as well, so you won’t have to worry about making space in your budget. If you are self-employed, you will need to contribute into a personal pension to avoid a compromised financial situation later in life.
8. Take full advantage of tax allowances
You can keep more of your hard-earned money for yourself by making the most of your yearly tax allowances. For example, you can save up to £20,000 annually into an Individual Savings Account (ISA) and pay no Income Tax on the interest or dividends received. Nor will you have to pay any Capital Gains Tax on profits from investments in a stocks and shares ISA. You can also pay up to £40,000 per year into your pension and benefit from pension tax relief.
Other useful tax allowances include:
- Tax-free allowances on financial gifts
- Capital Gains Tax annual allowance
- Personal Savings Allowance
9. Make a Will
We work closely with our legal team to ensure all clients have a valid, up-to-date Will in place, recording how you would like your assets, such as property, savings and investments, to be distributed when you die. If you die intestate (i.e., without a Will), your assets will be distributed according to intestacy law, a set of rules that dictates how assets should be dealt with in the absence of a Will. If you are not married to your partner, for example, they may find themselves unable to inherit. Having a Will also means you can plan to pass down your money in the most tax-efficient way possible.
10. Seek professional financial advice
There’s a great deal to consider when dealing effectively with your finances, so it’s no wonder that many people feel overwhelmed. Seeking professional financial advice will not only help you to manage your money better on a day-to-day basis, but can help you with life’s big financial decisions. Picking the best mortgage for your circumstances; putting in place adequate protection cover to keep your family safe; calculating the retirement income you’ll need and ensuring you have a solid plan in place to achieve it; helping you clear your debt and get your finances in better shape for the future… a financial adviser can help you achieve all of this and more.
To get in touch with our financial specialists, please call 0808 231 1320 and we will be delighted to assist you.
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This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks including the risk of possible loss of capital. Some information quoted was obtained from external sources we consider to be reliable.
Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314. Tees Financial Limited is registered in England and Wales. Registered number 4342506.
Chat to the Author, Adrian Ostler
Financial Services Manager, Wealth management, Cambridge officeMeet Adrian
- Areas of expertise
Adrian listens carefully and provides impartial advice which has been invaluable in helping to me reach my retirement and lifestyle goals. I have no hesitation in recommending Adrian, as his people skills are excellent and the advice given is always uncomplicated and succinct.