Many people struggle to manage their personal finances. They know they should be saving more, spending less, and setting achievable budgeting goals, but they simply don’t know where to start. 

This can have a profound effect on our wellbeing. A survey by the Mental Health Foundation found that one-in-ten people in the UK have felt hopeless about their financial circumstances, while 34% reported feeling anxious, and a further 29% said they felt stressed. With the economic situation worsening for many, we’re at risk of a serious epidemic of financial woe and associated health issues. 

It doesn’t have to be this way. Regardless of your current income, you can do better with your money. It’s about following a clear path of action that is based around a few key principles. Here’s what we’ll cover off in this article: 

• Setting and short, and long-term goals
• Creating a budget
• Saving for a rainy day – why you need an emergency fund
• Paying off debts
• Saving for retirement
• Investing for the long-term
• Borrowing – how, when and for what

Setting short, and long-term goals

Everything that we’ll discuss later, becomes so much easier with this first crucial step. With a north star, a clear desired outcome for both the short and long-term, making tough decisions with your finances becomes much easier. 

Avoid making goals around spending money (we all want to go on holiday!). The ability to spend will naturally come as a by-product of better managing your comings and goings. Instead, think of goals that will improve your financial outlook. 

In the short-term, this could be saving up enough money as an emergency fund, so you can look for a new job, or create a buffer to minimise the impact of credit card expenses. 

In the long-term, it could be saving 10% of your income for your retirement fund, contributing towards a deposit for a house, or university fees for your children. 

Making sacrifices becomes a lot easier when you know what you want to achieve. 

Creating a budget

According to a survey by the money management app Monese, as many as one-in-five people in the UK do no monthly budgeting. For those who want to achieve their long-term goals, you simply cannot find yourself in those 20% of people. 

We’ve covered how to build an effective budget as an SME before, and while there are obviously differences between professional and business finances, the core principles are broadly the same. 

An effective budget starts with an appraisal of the money coming in, the current costs going out, and the areas where savings can be made. 

There are a number of different models you can adopt for your budget. Practices like the 50/30/20 method — spending 50% on necessary living costs, 30% on desired expenses and saving 20% of post-tax income — have proven very popular. Zero-sum budgeting, the act of allocating all of our monthly salary to either spending, saving or investing, also incentivises budgeters to think proactively about where their money goes. 

There are a plethora of apps that can help too. Neobanks such as Monzo and Revolut have great budgeting features built into them, while open banking allows many apps to manage your spending without you having to continually keep track of outgoings. Even a humble Excel spreadsheet is a great place to start. 

No one method is foolproof. Consistency, with an understanding that sometimes life just gets in the way of plans, is the key. 

Saving for a rainy day – why you need an emergency fund

Despite our best intentions, life often gets in the way of our saving plans. That’s why it’s recommendable to have an explicit emergency fund for unexpected bills, or a loss of income. 

A good rule of thumb is to have three months of expenses ready to go. As and when this gets depleted, try and factor replenishing your reserves in your upcoming monthly budgets. 

It’s important to have this fund readily available, but separate from the accounts you use for spending. There’s no point having an emergency fund in an ISA you can’t touch for 20 years, but you also don’t want it tied to your most used debit card. A savings or a separate current account should do the trick. 

Paying off debts 

According to Debt Justice, as many as 25 million British adults are currently living in debt, or are afraid of going into the red. Some 10 million British adults are in ‘heavy debt’. 

While borrowing can be used to supercharge your finances (we’ll get onto how to borrow well later), high levels of high interest debts can seriously affect your ability to plan for the future. Credit card debt in particular, with interest rates now topping out at 30%, has the ability to completely ruin personal finances. 

If you have a good credit score, you can explore options, possibly moving debt from one card to another that offers an introductory offer on interest rates. Where multiple cards with high rates are in play, it’s best practice to ‘avalanche’ your payments, paying the minimum amount to lenders with lower rates, and paying off the more costly debts first. 

Either way, this will have to be accounted for within your budget, and should be a primary short term goal until that number hits zero. It will give you an enormous sense of wellbeing to be back in the black, and with effective planning, it’s definitely possible, no matter how bleak the situation may seem.

Saving for retirement

At the risk of turning off any readers in their 20s and 30s; it’s never too early to think about retirement. In fact, the earlier you can start the better. 

For people starting out, try to put away 5-10% per month as retirement savings; this can be invested through a stocks and shares ISA or a long term savings account such as a LISA. Never turn down the option for contributions to be made to a pension by your employer. A small ‘loss’ of income in the short-term will reap benefits in the future. 

For those later in life, worried they haven’t been squirrelling away, it’s never too late to start. There will be plenty of benchmarks saying you need ‘x times your salary by y age’ – ignore them. They remove any context, and are often arbitrary figures designed to give people a clear benchmark. The best time to start was yesterday, the second best is right now. You may have to use a bigger chunk of our income to save, but again, effectively budgeting should let you choose the expenses you can easily cut back on. 

One key point: workers of all ages must keep track of their private pension contributions, as this could be lost retirement income. As many as one-in-five UK workers lose track of at least one of their pensions; this is money being poured down the drain. 

Investing for the long-term

Further to effective saving, investing money wisely can also improve your long-term financial outlook. Of course, there are more risks involved. 

The last few years are a perfect example. In February 2020, the markets tumbled at the onset of the Covid-19 crisis, rebounded steadily, and subsequently crashed again in light of escalating inflation. The crypto bubble has popped, with many investors (primarily younger people) losing all of their life savings. 

Thad said; risk is always manageable. For long-term saving, prioritise funds and trackers tied to overall market performance, as opposed to individual companies. Trade through a trusted platform. Always prioritise long-term returns over short-term wins. 

We would also recommend seeking out the advice of a financial advisor. They are well placed to create an investment mix that suits your appetite for risk. 

Borrowing – how, when and for what

While we detailed how devastating large debt can be, it is with the knowledge that sometimes borrowing is entirely necessary. 

Studying at university, buying a house, or opening a business will require borrowing, and can have a material impact on your personal earnings and security for your whole life. A simple rule of thumb: borrow what you need. If you don’t need the living stipend from student finance to cover your living costs at uni, don’t take it. You’ll be paying back the money at an increasing interest rate for far longer than you’d think. 

Borrowing as little as possible will free up money further down the road, and hopefully keep your credit score high, making it easier to access funds in the future should you need it. 

Before committing to any big ticket purchases, or accessing large amounts of capital, explore your options. Seek out the opinions of trusted professionals, such as financial advisors or mortgage brokers, to assess how much you can borrow, and where you can find the best deals. 

For more advice on how to manage your personal finances, please don’t hesitate to get in touch. The team at Pennyhills can help you plan for a better future.