A guide to making big financial decisions

Making major financial decisions is no easy task – here’s a few things to consider before you take the plunge.
Person choosing direction | Wealthify
Reading time: 5 mins

Most people will be faced with big financial decisions at some point in their life. It could be buying a house, moving abroad, organising a wedding, starting a business, or even just saving for retirement. Whatever your big decision is, it’s important to take your time and ensure you’re making the right choices. Here are some nifty tips that could help you make better financial decisions.

 

Know your priorities
Chances are you’ve got many projects you’d like to bring to life, but realistically, you can’t fulfil all your dreams at the same time – you need to prioritise your goals. And a good way to do this is to separate your needs from your wants. For example, you may dream of getting married one day, but you don’t have a car, and it’s becoming a pressing issue. In this case, it could be wiser to prioritise the car, and think about the wedding a bit later.

Another way to prioritise effectively is to consider timescales. If you need something urgently, like that car, then it may be a good idea to put it at the top of your list. This doesn’t mean you should ignore your longer-term goals, but prioritising tells you what to focus on and how to divide your time and energy.

 

Do your research
Once you have your goals all prioritised, it’s important to do your research and find the best way to undertake your big financial decisions. Say, you’re planning on buying a car. Well, the first thing you could do is have a browse and look at prices. If you’re planning on starting a business, make sure you know what you have to do and how much money you may need to take the plunge. Having an idea of how much it may cost you will inform your decision making and  help you plan efficiently.

 

Weigh up the pros and cons
Before making any financial decisions, you may want to list all the pros and cons of every single option you have – it may be time-consuming, but it could help you make smarter choices as you’ll get a complete picture of all the scenarios possible. If you’re struggling to find pros and cons, why not ask your loved ones for help? They’ll be able to bring a new perspective, which could help you choose the right option.

For instance, if you’re planning on buying a house, you’ll need to compare all your savings options. Will you just use a savings account to reach your deposit target? Or will you invest? Or will you do both? This isn’t an easy choice, and you may want to look at the advantages and disadvantages of both saving and investing – this may involve some further research too but it’s worth it if you want to make informed decisions.

 

Make a plan
Making financial decisions requires you to plan ahead. Before you make your big purchase or start investing, you may want to review your financial situation and see where you currently stand financially speaking. If there’s not much money left after you’ve paid your bills and expenses, then you may want to start budgeting or wait for your situation to improve before you take any action towards your big projects.

If your finances are in a good shape, then you’re good to start planning and the first thing you could do is work out how much you need to put aside to bring your financial dreams to life. It doesn’t have to be thousands, especially if you can’t afford it. Being realistic is important when taking big financial decisions – there’s no point in getting yourself into a lot of debt just for a shiny new car or a luxurious wedding. If anything, use what you already have, be consistent, and keep up the effort over a number of years – after all, £150 saved every month over 5 years is £9,000 – that’s a pretty good sum, no?

 

Think about your later life
When it comes to making big financial decisions, it’s important to adopt a long-term vision and think about your later life. It’s not the most exciting thing but planning for retirement sooner rather than later could pay off. So, whatever your age, it’s always a good idea to check your state pension and review how much you’ve got in your workplace pension(s). This will tell you whether you’re on track with your retirement goals. And if you’re not, then you can start looking at other options to boost your savings.

One way to do this could be to open a personal pension, or SIPP (Self-Investing Personal Pension). A personal pension lets you make your own contributions, and for each deposit, you’ll get a 20% tax relief from the government. So, if you’re a basic rate taxpayer, you should receive £20 for each £80 you put in your pot – now if you look a bit closer, you’ll notice that £20 is 25% of £80, meaning you’re effectively getting a 25% top-up on each contribution you make. One thing to note is that the amount you get tax relief on is limited to £40,000 per tax year, or the totality of your income (whichever is lower) – this is your pension annual allowance, and it includes contributions made by you and the government.

Right now, you may not see the point of having a personal pension, especially if you’ve got other financial priorities. But with Wealthify, you can start with just £50, and this sum invested every month for 40 years could give you a pot worth £72,3551. What’s more, with a Wealthify Pension, you get a team of experts here to do the hard work for you – this includes picking your investments and managing your Plan on an ongoing basis.

 

Reference:

1: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £44,837. If markets perform better, your return could be £124,630. Values correct as of 17/12/2020

 

The tax treatment depends on your individual circumstances and may be subject to change in the future.

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

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