A beginner's guide to getting your finances in order

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When it comes to financial literacy in the UK, a lot of it is learned the hard way – through trial and error. In many cases, it’s because you’ve had to conduct active research to tackle a problem you’re currently facing.  

Just think about the application for a mortgage for example. It’s never taught to you in school and there’s no preparation for it – in fact, it’s not until you’re actively applying for one that you’ll really see what’s needed.  

The same is often true with opening a Stocks and Shares ISA. If you’ve never done it before, then you might think that it's really complicated or that you’d need a huge sum of money to get started. However, neither of those points are true! 

With this in mind, here are five ways that you could get your finances in order. 

#1 Emergency Savings

Whether you call it emergency savings, a rainy-day pot, or even your buffer money, having some money set aside to help cover surprise costs is good practice. However, 47% of UK adults don’t have any money set aside for this – and only 33% of those that do have savings believe it’s enough to cover living costs for one month.[1] 

But the important words here are ‘living costs’. This is because being able to cover the essentials in a time of need could reduce further financial burden and stress down the line. Typically, an emergency fund would be able to cover your mortgage or rent, food shop, utilities, and essential transportation, but exactly how much to save in an emergency fund will depend on your personal circumstances.  

A rule of thumb you could use is to try and save up enough to cover at least three months of essential outgoings – so if you spend £1,000 each month on utilities, housing, and food, then you may want to try and save at least £3,000 as an emergency fund. If your circumstances change, it may be worth looking at the impact on your savings goal – for example, with the increase in energy prices, you’re likely to see an increase in your outgoings which may also increase the amount you’d want to have tucked away as your emergency savings.  

Where to keep your emergency fund is another matter entirely. As you may need to access it quickly, and you want the amount to stay fixed, it could be a good idea to look for an instant access savings account. If you can find one with a decent interest rate, then that’s great, but don’t be tempted to lock it away – although you might not need those savings right now, you never know what might happen in future, so instant access might be more important than getting strong returns on this money.

#2 Inflation 

You can’t move these days without seeing something about the increased cost of living, and in a nutshell, that’s inflation. Over time, the cost of things rises (for example, the cost of basic groceries and things like train fares), and this is measured in a percentage. The rate of inflation is then measured by the average increase of a large number of products and services.  

The reason for increases in prices can be dependent on a wide range of factors, from increased demand and higher costs of production to paying higher wages or increased costs in raw materials when producing goods. These increases could be pinned to one specific thing or spread across a wide array of reasons.  

Why is inflation important? Put simply, because it impacts the money you have saved just as much as it does the money you’re spending in the here and now. 

In the UK, the Bank of England has a target rate of inflation at 2%. However, in the first quarter of 2022, this has increased to 6.2%.[2] To try and keep inflation under control, the Bank of England has released new monetary policy to try and meet its 2% target while also sustaining growth and employment. This comes in the form of higher interest rates, which can allow savers to get more return from the savings in their bank. 

The problem with inflation is that it could outpace your interest rates – for example, if your savings are receiving a 1.5% interest rate, but the inflation rate is 6%, then your money is losing 4.5% of its purchasing power. The longer this goes on, the less your money might be able to buy in the future. Because of this, you might want to try and make decisions with your money that aim to beat the rate of inflation in the long term.  

#3 Insurance 

There’s insurance for absolutely everything these days, from mobile phone cover to car insurance, travel insurance to life insurance, and so much more. Some of these are legally required and can’t be skipped to save a few pennies, while others are up to your better judgement. But nobody teaches you which insurance policies are worth it or not.  

So, how do you know whether you need insurance in a specific instance, and if you do, what policy should you even go for? 

For most people, it’ll depend on your current circumstances, and sometimes that’s pretty self-explanatory. Not going on holiday? You probably don’t need travel insurance. However, sometimes it isn’t as simple as that. One example of this is life insurance.  

Life insurance is a bit like a pension. You don’t often think about it when you’re young, so you kick it to the back of your mind. But the longer you leave it, the more expensive (or difficult) it could be to sort out. If you have a mortgage on a house that you bought with a partner, then life insurance could help to cover the cost of that house should you die early. Alternatively, it could help to provide for your children if you have them. 

This isn’t something you legally need to have, but it might be a good idea to arrange life insurance if you have someone who would be financially affected if you died. Life insurance could help protect them from any financial shocks if the worst was ever to happen.  

This is an approach you may want to think about with other types of insurance – for example, if you have a £1,000 phone and are paying £20 a month in insurance is that worth the cost? At that price, you’d be paying the full £1,000 in just over 4 years, so this depends on how long you keep your phones (and probably how often you break them). 

#4 Investing 

Investing is something that’s often talked about but rarely taught. This is probably why only 14% of Brits invest in stocks and shares.[3] But why, exactly, is investing worth knowing about? What are the benefits of investing? How hard is it to do? And are returns guaranteed? 

Put simply, investing gives your money more potential. Instead of just being tied to a single interest rate (like that 1.5% from the Bank of England) you could have lots of different returns from many different types of investments. These types of investments are called asset classes and they range from the stocks and shares (which are very popular) to government or corporate bonds (which are similar to you loaning them your money), all the way through to property, and even physical things like gold, silver, or oil. 

Because each of these asset classes offer different returns, your returns could beat out inflation over the years. For example, if you held shares that returned 10% over the year, and inflation stayed at 6%, then your money would have increased in value by 4%. However, it’s worth noting that returns are not guaranteed, and the value of your investments can go down as well as up.  

But by holding many different asset classes – an investing technique called ‘diversification’ – you have the opportunity for some better-performing investments to balance out any that don’t do so well. 

In terms of how difficult investing is, that’s up to you. With services like Wealthify, investing is as easy as signing up, adding money, and letting a team of experts handle all your investment decisions for you. The benefits of this are that anyone can do it, you don’t need to spend hours, days, or even weeks researching investment options, and you can get started with as little as £1.  

However, if you wanted to take on the challenge yourself, that’s possible too. To get started, you’ll need to find a share dealing platform that you trust, and know what it is that you want to invest in. This approach takes more time and attention to detail, and it could cost more to do, but you’ll have complete control over what you’re invested in and the weighting of each investment. 

#5 Pensions 

There are so many questions about saving for retirement that we’ve busted 13 pension myths already. One fact about pensions that you might still not know about is that you can transfer a pension (such as a past workplace pension) to another provider, or even bring all of your pensions together in one pot. Not only could this help you to keep better track of your retirement savings, but it could also save you a small fortune in fees over the years (that’s another fact that you might not know; every pension provider charges you a fee for managing your pension). 

The other big question is: how much money do I need to save in order to retire? Like everything else we’ve talked about here, that figure is pretty subjective and will have a lot to do with your personal circumstances. A rule of thumb you could use is to have somewhere between half and two-thirds of your salary, although what your salary is will also impact that. For example, if you’re on minimum wage you might need to tuck a lot more away percentage-wise than someone who’s on £100k a year. Other factors would also include your cost of living, whether you own your home outright, and how you’re planning to spend your retirement. 

When planning for retirement, a good thing you could try to do is to start as early as possible. This is because the earlier you start, the more time you’ll have to take advantage of a little bit of investment magic called ‘compounding’. Compounding is when you reinvest any profits that your investments make. Those profits could then make more profits, which could then make even more profits – and the longer this goes on, the more potential profits your money could make.  

Are you confused by any other financial jargon or want to know how investing works? Let us know on Facebook, Twitter, or Instagram!

  

  1. https://www.aldermore.co.uk/about-us/newsroom/2021/03/half-of-brits-do-not-have-any-money-set-aside-in-an-emergency-fund/
  2. https://www.bankofengland.co.uk/monetary-policy/inflation
  3. https://www.fool.co.uk/personal-finance/share-dealing/learn/just-14-of-brits-are-investing-in-stocks-and-shares-but-more-are-keen-to-get-started/

 

With investing your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested. 

 

Wealthify does not offer advice, if you’re unsure about investing please speak to a financial provider.  

 

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