Secure your finances in 5 simple steps
Investment boss Rob Gardner reveals his route map to future prosperity
NEXT Monday marks the start of national Debt Awareness Week. So we asked Rob Gardner, head of investment at wealth management firm St James’s Place, to give us his guide to fixing our finances in five steps.
Rob said: “Debt Awareness Week is a good time to take stock of where you are financially, and start treating your ‘financial wellbeing’ with the same care you would treat your health.
“Many of us know how important mental wellbeing and mental resilience is, and financial resilience and wellbeing is just as important.
“According to research by the Royal College of Psychiatrists, 50 per cent of mental health issues come from owing money and being in debt.
“It is why, before you start to think about growing your money, it’s important to build financial resilience, and that means taking steps to be prepared for life’s ‘bumps in the road’.”
Here are Rob’s five steps:
1 Have a plan and keep it realistic
What are your goals? Are you saving for a house, or a holiday, or investing for a comfortable retirement?
Do you have debt to manage first?
Understanding where you are is the most urgent job to do.
Make a list of anything you owe – store cards, loans etc – as well as what you’re spending and earning each month/year. Then, think about where you want to get to in the next decade and beyond.
Ten years might sound like a long time, but it will come around quickly. Next year will be a decade since the London Olympics. If you made some changes to your personal finance back then, you’d be seeing the positive impact in a big way today.
It’s important to write down what your goals are, with the specific numbers, because then you can put steps into place to achieve them.
It may sound like a basic thing to do but you’d be surprised how many people don’t have a clear idea of what they specifically want in the future, and what money they need to achieve that life.
It’s also easy to become blind to what our current financial situation really is, unless we check in like this and properly keep track.
Think of it like asking a personal trainer to come up with a fitness plan for someone without knowing their current body type and weight, or what they want to achieve.
Their aims could be as diverse as just losing a few pounds for an upcoming wedding, or becoming a bodybuilding champion.
Once you know the starting position and end goal, you can devise a plan and timeline for achieving it.
2 If you have any high interest debt, prioritise getting out of it
This is so important, and by high interest debt I’m talking about store cards or credit cards, not a mortgage that is against your home, which is your asset. Not tackling these debts first defeats the point of any good budgeting and saving you do elsewhere.
It’s all too easy to feel like you’re making good headway when you’re paying off the minimum on those bills, and your savings account balance is going up.
But those store cards or credit cards are racking up interest, creating a huge invisible leak that is probably costing more than you’re saving, and every month eats away at your ability to reach your goals faster. Did you know the average store card interest is as high as 24 per cent APR? That means with interest, the money you owe could double in size every three years. Make sure you know what interest you are paying and then see if you can lower this by taking out a loan, using an overdraft or finding another way to pay it off that charges you less interest. For example, a £1000 debt at 24 per cent interest, swapped with a loan charging just seven per cent, is a saving of £170 a year, meaning you’re able to put that cash towards paying the loan off quicker. Lots of people may feel scared to take out another loan when they’re already in debt. But often the loan will have better rates which allows you to put the money saved towards paying off your balance.
Credit card debt is like a huge invisible leak that will cost more than you’re saving
3 Build a rainy day fund
Often debt can happen because one of life’s bumps in the road comes along and surprises us.
Suddenly we have a big bill pay which we haven’t accounted for, and we have to find emergency money with large interest rates attached, or turn to those equally pricey credit cards and store cards to supplement the rest of the month’s necessary purchases.
As soon as you’re debt-free the goal is to start building an emergency pot of money you can rely on when the unexpected happens, which it always does
Taking control and planning for the unexpected with a cash buffer is key to having less stress about money.
Everyone’s emergency cash fund will be different – it could be £500, one month’s salary or three – but the point is you should have a pot of money set aside that you don't spend to help you avoid going back into debt.
What you save for future goals will be a separate pot, that you only
focus on once you’ve saved the optimum rainy-day amount. Start thinking of your money like you do your smartphone battery. Having a spare battery pack is your rainy-day emergency fund which you can plug into if you need to, instead of having to frantically shut down apps, run into the red and risk running out of juice altogether.
4 With the basics covered, start saving for the bigger goals
You can use this method to save for your rainy-day fund too, but the best way to start finding money you can set aside for the future is to differentiate between your “wants” and your “needs”.
There’s a famous quote that says, “you can have anything you want, but you can’t have everything you want” and it’s true.
Making small changes in how you decide to spend your money today will add up to help you start creating a pot of money you can put towards your rainy-day buffer and, later, your future.
Start with a ruthless analysis of what you’re spending: go through your bank statements and direct debits and make a list of “necessities” and “non-essentials” and ask yourself if you truly need everything that you’re spending on, such as subscriptions and memberships.
Then cancel any that don’t make the cut and put that money directly into your savings.
You might be surprised how much wiggle room you can find here. How determined you want to be about this takes us back to the original plan, and how ambitious the end goal versus your starting point is.
Take your rent, for example, which feels like an essential. But this could be put towards creating extra funds for saving if you can move in with family for a few months. Remote working might make such a move possible.
5 Invest to make that money grow over the long term
By now you should no longer hold any highinterest debt, you have an emergency pot set aside so you don’t risk falling back into money troubles, and you have started adjusting your spending to find more cash to put towards investing in your future. Your emergency buffer is a critical step because it will give you the freedom and flexibility to leave the extra money you have saved in your investments for longer which is crucial, without having to cash them in when it’s not the most opportune time to do so. Long-term wealth creation is about leaving your money in your investments so that they grow: It is about decades, not days.
Many people miss out on the best market returns because they panic when markets fall and they move their money.
Of course, if you do this, you sell your assets when their value has already taken a hammering.
Also, find out about and start to make use of all your tax allowances too, such as your annual ISA allowance and pension allowance.
Many working people also have an employer that will match pension contributions into a company-run scheme, so if that’s an option, start taking them up on it.
If you don’t do this it’s like turning down a pay rise.
Having a plan, and following these steps, is the key to feeling confident about your finances, and in control of where you’re headed.
We can all expect the unexpected to happen but when it does you can drop back a stage in the above steps. Then, when you’re ready, focus on getting back on track before trying to move on to the next stage again.