Five steps for a smooth ride to financial security
INVESTMENT BOSS ROB GARDNER TELLS TRICIA PHILLIPS HIS ROUTE TO FINANCIAL PROSPERITY
IT’S 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 says: “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 treat your health.
“According to research by the Royal College of Psychiatrists, 50% 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 realistic plan
What are your goals? Are you saving for a house, a holiday, or investing for a comfortable retirement? Do you have debt to manage first?
Understanding where you are is the most urgent job. 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 a long time, but it will come around quickly. Next year will be a decade since the London Olympics. If you made changes to personal finance then, you’d be seeing a big positive impact today.
It’s important to write down your goals, with the specific numbers, because then you can put steps into place to achieve them.
It may sound basic, but many people don’t have a clear idea of what they want in the future, and what money they might need. 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.
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. I’m talking about store cards or credit cards, not a mortgage against your home, which is your asset. Not tackling debts first defeats the point of good budgeting and saving elsewhere.
It’s all too easy to feel you’re making headway when you’re paying off the minimum on those bills, and your savings balance is going up. But those store cards or credit cards are racking up interest, creating a huge invisible leak that’s probably 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% 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 another way to pay it off that charges less interest.
For example, a £1,000 debt at 24% interest, swapped with a loan charging just 7%, is a saving of £170 a year, meaning you’re able to put that cash towards paying the loan off quicker.
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.
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 to pay, and we have to find emergency money with large interest rates, or turn to those pricey credit and store cards to supplement the month’s necessary purchases.
As soon as you’re debt free, the goal is to start building an emergency pot of money. Taking control and planning for the unexpected with a cash buffer is key to less stress about money.
Everyone’s emergency cash fund will be different – it could be £500, one month’s salary or three – but you should have a pot of money set aside that you don’t spend to help avoid going back into debt.
What you save for future goals will be a separate pot, that you focus on once you’ve saved the optimum rainyday amount.
4. 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 differcosting entiate between ‘wants’ and ‘needs.’
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 bank statements and direct debits and list all ‘necessities’ and ‘non-essentials’ and ask if you need everything you’re spending on, such as subscriptions and memberships.
Then cancel any that don’t make the cut and put that money directly into 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 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 high-interest 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 money to put towards investing into your financial 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 move their money. 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 companyrun 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.
Many miss out on the best market returns because they panic when markets fall