Treat cash like a video game and you’ll avoid ‘Game over’

TRICIA PHILLIPS highlights three key money moves millennials need to make

THE need for a financial safety net has been proved beyond doubt by the Covid-19 crisis. And it’s especially important for younger people – the under-40s who have been hardest hit by furlough and job losses.

Money problems can damage our mental health and tear relationships apart. Survival is the financial priority – aiming to be debt free with cash set aside to weather any storms.

We’ve teamed up with financial education campaigner Rob Gardner for tips to help younger people find financial freedom.

Children’s author and investment director at St James’ Place wealth management, Rob says: “The best way to think about approaching finances is like playing a video game – there are different levels and you should aim to complete each level before moving to the next.

“Too often people are focused on saving for a holiday, a house or retirement when they haven’t set themselves up with the basics, and that is to be financially resilient.”

LEVEL 1: YOU HAVE LOTS OF DEBT AND NO EMERGENCY FUND

THE first thing to do is clear any debt. There’s little point saving when debts are mounting and you’re paying interest that could be better spent. Tackle credit and store cards first, as these are a big drain on cash.

■ If you work and can pay more than the monthly minimum – do it.

■ See if you can lower the interest rate by repaying card debt using a cheaper unsecured loan, or move debt to a 0% balance transfer card.

Loans can have much lower interest rates and offer a structured way to clear the debt. For example, a £1,000 credit card debt at 22% interest, paid off and replaced with a loan charging 7%, will save £150pa.

■ If you’re in a more extreme situation with no income and debts mounting, you’ll need more drastic action to stop the situation spiralling out of control.

Explain your situation to firms chasing debt – the majority of lenders are being more flexible during the coronavirus crisis.

The Financial Conduct Authority has asked banks to make current account overdrafts interest-free up to £500, so check this is in place with your bank. Also, ‘payment holidays’ on credit cards, many loans, store cards, and finance options for cars, can reduce the pressure while you get back on your feet.

Most companies will give you breathing space of 30 days if you explain you’re in trouble and seeking advice from a debt charity.

Get free, independent debt advice: from your local Citizens Advice branch or visit citizensadvice.org. uk, call the National Debtline on 0808 808 4000, contact Stepchange Debt Charity on 0800 138 1111 or stepchange.org

LEVEL 2: NO DEBT AND NO EMERGENCY CASH FUND

THE goal for this level is to avoid going back into debt, and to start building an emergency pot for when the unexpected happens.

Everyone’s fund will be different. The rule of thumb is to have enough to cover three months’ worth of bills, and preferably six, so you have breathing space if your income stops.

Think about your money like a smartphone battery. We know what to do when we hit that last 20% – we shut down energy draining apps and go into power saving mode. Some of us might have a spare battery pack we can use to charge it up again.

This pack is like your emergency fund and the ultimate goal is to have cash set aside to make sure you’re never completely out of juice.

Without an emergency fund you’ll need to put yourself into ‘moneysaving mode’ until you can put aside enough to create this buffer.

■ Start with a ruthless analysis of what you’re spending. Go through bank statements and make a list of ‘necessities’ and ‘non-essentials’.

Even rent, which feels like an essential, could be put towards creating that financial float if you’re able to move in with your parents temporarily, especially now remote working is more widely accepted.

Small sacrifices aren’t forever and will help you build that buffer.

■ When you get an unexpected bill, or financial emergency, you can dip into your pot without the stress of not knowing how you’ll cover it, and without impacting day-to-day life.

■ You’ll need to top up the pot again by going into money-saving mode until you’ve repaid what you used, before moving onto or continuing with the next level.

■ THE pandemic has shown is where we can make cutbacks – no one has been eating out, and more people will be working out at home since gyms are shut. Consider what changes you’ve been forced to make during lockdown that you can continue with when the world goes back to ‘normal’, to help build that buffer as quickly as possible – and move on to the next level.

LEVEL 3: NO DEBT AND AN EMERGENCY CASH FUND

YOU have financial resilience, so now you can think about longer-term goals are and how to achieve them.

All investment and longer-term savings decisions should start with the following two questions: ‘What are the things in life I want to do?’ and ‘When do I want to do them?’

The answers will determine how much risk you want to take on and the time period for your investments.

For example, if you want to buy a house in the next three to five years, save in a way that isn’t as risky as if you were saving for retirement, and is flexible so you can withdraw your money when you need it.

That rules out investments like pensions which lock money away until a certain age and/or the stock market which usually needs more than five years to weather the ups and downs so you get a return.

■ Consider ISAs and the Lifetime ISA – providing you understand the penalties for withdrawing outside of the terms you’ll sign up to.

With the LISA you have to pay 20% of your fund back to the Government if you withdraw cash for any other reason than to buy a home, or when you reach age 60.

■ If you already have a home, or are able to save for both a shorter-term goal like a house purchase as well as retirement, you can consider riskier, less flexible, longer-term investment, with the understanding that money may go up or down in the short term.

Taking the steps to progress through the levels will give you the confidence to be comfortable with this, as the money invested isn’t needed in the near future to pay off debts, bail you out of emergencies, or even go towards your shorterterm life goals.

■ Being confident and comfortable are objectives on this level – and becoming more comfortable when talking about money with others.

We don’t talk enough about money, but there’s a lot of knowledge out there which could help you with your planning and decision making.

Tips can come from a professional, or friends and family. Get regular help from people who know more about money than you, and who are on your side.