Ensuring you get peace of mind over cash
How to set out on journey to peace of mind over money
EVERYBODY dreams of financial security in life but – unless your lottery numbers come up – it isn’t going to happen overnight.
Yet with some determination, savvy decisions and selfdiscipline, we can all get to a place where money won’t be a relentless nightmare.
The long journey to peace of mind money-wise calls for careful spending, minimising debts, insuring against death and illness, and saving towards retirement.
If all that seems daunting, break the journey down into baby steps, and take them one at a time.
Here’s our six-step programme to financial security. The sooner you get started, the more secure you’ll feel.
Control your spending
As lockdown restrictions are lifted, many will be tempted to splurge again.
But while we all deserve a bit of fun after the past year, don’t get carried away, warned Zoe Bailey, chartered financial planner at planning and investment firm Tilney.
“The pandemic has shown how the unexpected can happen in a flash, so you need to be prepared,” she said.
More than half of us are worried about how much we will spend in the weeks ahead, said research by mobile money app Monese, which offers an alternative to traditional banks.
The app’s Sarah Holt advises examining your monthly income and essential outgoings, including regular monthly savings, to see how much you have left for luxuries.
The trick is not to blow it all at once. “You might want to head to the pub, get a haircut and go for dinner in the first couple of weeks,” she said. “But can you afford that?
“Spreading things out gives you something to look forward to.”
Pay down debt
It’s the four-letter word that haunts so many of us in Britain and a real curse if it gets out of hand.
More than 14million people have seen their income hit since March last year, according to debt charity StepChange.
It’s now too late to get a Covid payment holiday for your mortgage, credit card, overdraft and other debts, but talk to your lender if struggling.
Missing payments will hit your credit score and make it harder to access credit in future.
Andrew Hagger, personal finance expert at MoneyComms, said if you have several debts, target the dearest first while servicing payments on other forms of credit. “Once you have paid that off, move onto the next.” He advises shifting credit card debt to a zerointerest balance transfer card, ensuring you clear the debt within the introductory period. If you’re still struggling, get free advice from Citizens Advice, StepChange or National Debtline.
Build an emergency fund
Once you’ve cleared expensive short-term debt, start building up a rainy day fund. Ideally, aim for enough to cover six months of living expenses in case of sickness, illness or redundancy, or unexpected costs such as car repairs or boiler breakdown.
Keep it in an interest-paying easy access account.
About 6.6million of us have no rainy day fund, research by Mastercard app Yolt shows, and the pandemic has made their plight worse.
About £12,500 is reckoned to be the ideal amount for a “rainy day” fund but three out of five Brits fall short by £8000 on average.
Ewan Edwards, head of savings at online retail bank Aldermore, said: “Don’t just put aside loose change, try to save a set amount each month.
“If outgoings fall, look at raising what you save.”
Seek protection
Another important step towards building financial security is to take out the right insurance.
We all know you have to have car insurance and we should think the same way about holiday insurance, especially given current uncertainties. Homeowners should protect their property with buildings insurance, and everyone should try to afford contents cover. If you have dependents, life insurance is a must in case the worst happens. Term life assurance pays out if you die during a pre-agreed term and is surprisingly cheap. A 40-year-old non-smoker buying £100,000 of life insurance to age 65 would pay from £10 a month, although heavy drinking, smoking or health problems would bump that up. Combining life cover with critical illness cover – which pays out if you survive a serious illness such as heart attack or stroke – would cost from £40 a month. Insurers Aegon, Aviva, Legal & General, LV, Royal London and Zurich all offer life cover. You can get fast online quotes from comparison sites or specialists
Covid showed us unexpected can happen in a flash – so you need to be prepared
such as LifeSearch. Also consider income protection, which will cover your earnings if you are sick and cannot work.
A 40-year-old non-smoker could get replacement income of £1000 a month for £15 to £20 a month, kicking in after three months of illness.
Emma Walker, chief marketing officer at LifeSearch, said income protection plans vary.
She added: “They can pay for just a few weeks or until retirement age.”
Build your pension pot
You’re never too young to start planning your pension. The first £1 you invest in one is the most valuable of all, as that has longest to rise in value.
Say you invest £100 a month at 25 and your money grows at an average six per cent a year. By 67, you will have £223,809.
If you don’t start until 35, your monthly £100 will grow to just £115,612, assuming the same growth.
Many young people don’t realise this and pay the price. Leah Hampton, 25, is paying into a pension but doesn’t know how much goes in each month or whether it will be enough for retirement.
She admitted: “I haven’t really taken the time to learn about pensions and how they work.”
Leah, from Gloucestershire, does have one clear retirement goal, though.
She said: “I don’t own my house yet but I hope to once I’ve retired. That way, I won’t have to worry about rent or a mortgage.”
Every employee aged 22 and above who earns at least £10,000 a year should now get a workplace pension under the auto-enrolment scheme.
If you pay in four per cent of your salary, your employer must contribute at least three per cent, and then the tax relief you get adds another one per cent.
This effectively doubles your contribution. Resist the temptation to opt out, as you are effectively turning down free money. Kevin Mountford, co-founder of savings platform Raisin UK, said if you earned, say, £25,000 and invested two per cent of your salary, that would add another £500 a year to your pot. “Over the years this will build up for when you’re ready to retire.” Mountford also suggested increasing your pension contributions by two per cent or three per cent every year. Saving into a pension may sound a bit boring, so you should try to imagine what you can actually do with this pension money. “You could use the money to go on a cruise and see the world after you retire,” he said. Invest tax-free using your annual £20,000 ISA allowance, or make pension contributions and claim tax relief on top.
Have a plan for later life
If you die without an up-to-date will, your final legacy could be family arguments and disputes.
Despite that, about a half of adults in Britain haven’t written a will.
Chris Hardie, financial planner at investment management firm 7IM, said even though nobody likes to think about their death, planning for it can save them and their family both emotional and financial stress.
“Dealing with a dispute over a loved one’s estate is not how you want to spend your time grieving,” he added.
He advised talking to your family, and making sure they’re clear about your wishes – and set up a Lasting Power of Attorney as well.
This allows a trusted family member or friend to make financial decisions on your behalf if you lose your mental capacity following dementia or Alzheimer’s, or a serious accident.
“By putting this in place when you still can, you and your family will know what to do,” said Hardie.
Finally, consider how to pay the bill if you need long-term care in your final years.
I hope to own a home, so when I retire I don’t have mortgage or rent worries