Money moves to make now
Does your bank balance feel permanently out of control? It’s time to switch things up. Make these smart financial tweaks and future you will be grateful
Do you only log on to your online banking if you really have to?
Hand over your debit card with your fingers crossed? We know, turning a blind eye to your finances feels much easier than getting to grips with them. But if the last 12 months have taught us anything, it’s that having a plan (and some wriggle room) when it comes to your money is No. Bad. Thing. Especially as money worries can snake into all corners of our lives – 61% of adults aged 18 to 34 admit they stress about their financial situation,* which in turn impacts their overall wellbeing and even their abilities at work. Being permanently skint, not having savings to fall back on, or being unable to afford big-ticket items has a tangible impact. And while you may think you’re not in a position to future-proof your finances, there’s always something you can do. From budgeting to saving and (whisper it) investing, here are the money shifts to make now to ensure you’re set up for whatever comes your way.
START BUDGETING
Wait, it’s not as snoozy as it sounds. A budget is simply an understanding of what you earn and spend, and creating one is the most important thing you can do to get your finances under control.
To start, list all your expenses (rent, bills, food, entertainment, gym) and your income. Money Advice Service’s budgeting tool (Moneyadviceservice.org.uk) can help. “Be honest about your spending,” says Lisa Conway-Hughes, financial advisor and co-founder of Ladies Finance Club UK.
Ideally, you’ll have more coming in than going out, but don’t worry if that’s not the case. Then, take a look at where you can cut back. Start with bills, such as your phone or broadband. Shop around for a better deal using comparison sites like Uswitch or Compare The Market. Free apps like Snoop and Emma link with your current account and can help you identify better deals. Emma will analyse all your active subscriptions, alert you if prices are creeping up, and highlight ones you don’t use. Snoop works in a similar way, but also gives you money-saving tips, lets you know if there are any voucher codes available, and finds cheaper utilities, broadband or mobile phone deals.
Once you’ve cut your spending back to an amount that is below your income, try the 50/30/20 rule of budgeting. On payday, split your money up into three pots: 50% goes on essentials (bills, food and travel to work, for example), 30% is for wants (clothes, make-up and eating out), and 20% goes towards savings. Don’t panic if this rule isn’t working just yet. You can mix it up: if you can only afford to save 10% of your income, start with that, then increase it over time. Banks like Starling and Monzo make this approach easier by letting you set up separate savings pots and automatically transferring money for you on payday.
SWITCH YOUR OVERDRAFT
Even with a strong budget, we all need a cushion now and then. But if you dip into an overdraft, you could be slapped with interest charges as high as 40%. Ouch! So make sure you only use an overdraft if it is an emergency and there is no alternative. If you find yourself in that position regularly, move to a bank with an interest-free buffer – First Direct or M&S Bank, for example, will allow you up to £250 without charging interest.† If you’re struggling with debt, contact StepChange (Stepchange.org or 0800 138 1111) for free debt advice and help with solutions.
BOOST YOUR SAVINGS
With your budgeting plan sorted, you’ll soon be ready to save – even if you feel like you can’t right now. Your first aim? To build a slush fund. This is money you can use for unexpected life events – like a pandemic-induced job scare, dare we say, or a new laptop when yours gives up. These are savings to cushion life’s blows. Money experts say this should be around three to six months’ income, but if that’s not possible, think about what would be – perhaps a month’s rent, or two months’ living costs? Once you’ve got that, start building saving pots for your life goals – a house deposit, your first car or a much-needed holiday. Depending on where you bank, you can create dedicated saving pots for each aim. Starling Bank allows you to put up pictures of your goals and add money to different pots when allocating your savings.
Save your money in an account with a good interest rate – they’re scarce at the moment, so it could be that your current account offers a competitive rate, or look into a fixed-rate account, where you don’t touch your money for a year or two in exchange for more interest. Compare bank accounts and rates at Moneyfacts.co.uk.
START INVESTING
While saving is always a good idea, once you’ve been doing it a while, you might notice that you haven’t gained much interest, if any. “If you put £10 per month into a standard savings account, in five years, you would have contributed £600 and have £616, assuming an annual interest rate of 1%, which is generous in the current climate,” says Myron Jobson, personal finance campaigner at Interactive
“EVEN WITH A STRONG BUDGET, WE ALL NEED A CUSHION SOMETIMES”
Investor. But here’s the thing: as the cost of living increases, your money needs to grow with it. If it doesn’t, then what you’re saving will be worth less in years to come.
The solution? Investing. “If you invested £10 a month, in five years it would be £683, assuming an average return of 5% per year,” continues Jobson. “In 10 years, you’d have £1,559.” And you don’t have to be a city banker to start – in fact, you can start with £1. If you’ve never invested, start small with an app like Moneybox, which can round up your spare change and invest it for you. So if you buy a £2.45 latte, it’ll shift 55p into investments. Once you’ve built up your confidence, move to other platforms and start paying in a regular amount. Some providers, like Nutmeg and Wealthify, assess your attitude to risk and your goals, then automatically create an investment portfolio for you.‡ Investments can go up and down, depending on how markets perform, so be in it for the long-term – at least five to 10 years. This gives your money a chance to grow and outride any dips in the market.
SAVE INTO A PENSION
We know, pensions are about as sexy as getting a root canal, but starting young is super-savvy. Why? “Someone earning £25,000 and aiming to retire at 65 could bag a retirement pot of £169,000 if they start in their twenties,” says Jess Miller, pensions and investment expert at Schroders. But if they start in their thirties, this drops to £93,000.”
Anyone over 22 who earns over £10,000 will be automatically enrolled in a work pension scheme, and your employer will add money as well as you. Free money? From your boss? Yep. The minimum you have to pay into a pension is 5% of your income, and your employer has to pay in 3%. But if you pay in more, your employer will match it – so that’s extra free cash.
CHECK YOUR CREDIT SCORE
This number shows lenders your reliability when applying for credit (that includes everything from buying a sofa on finance to bagging your first mortgage). If it’s bad, you won’t get the best deals and could even be rejected. So bite the bullet: it’s better to know your score before applying for credit, because a rejected application will leave a mark on your report and reduce your score further.
Check your credit score for free using Experian, Equifax or TransUnion. The score is colour-coded, and if yours is in the red zone, it’s a warning sign that you need to take action to improve it before applying for any credit. “Simple steps like registering to vote or reducing your debt will improve your score,” says James Jones, head of consumer affairs at Experian. “Missed bill payments will reduce your score, so set up direct debits for them.” Experian’s “Boost” service also makes sure that payments to your multimedia accounts, like Netflix or Spotify, count towards your credit score, while Natwest is rolling out a bill-splitting app called “Housemate” this year, which allows your rent payments to count towards building your score.