Money is one of life’s greatest last taboos. We feel able to talk about almost anything else with friends, family or colleagues. Yet money is still something that most people just don’t talk about.
Thankfully things are gradually changing, with this generation much more likely to be open about money than previous generations. But it can still be a tough topic to face.
Some of the reasons we don’t like talking about money are that we don’t think we’re very good with money, we’re embarrassed if we have debts, or we’re not sure how we compare financially with others. But if we are not discussing financial issues with anyone else, we have no way of knowing whether any of this is true or just in our minds.
As a starting point, it’s a good idea to be honest with yourself about the state of your finances. In this article we consider seven steps you should take to work out just how healthy your finances are.
A good place to start is to get a quick and easy overview of your net worth. The way to do this is to make one list of everything you own: your assets. This includes your home, savings, investments and cash in the bank. Make a list of your assets and roughly how much they are worth.
Then make a second list of anything you owe, and how much. For example, mortgage, loans (including student loan), credit cards. These are your liabilities.
If you subtract the second list from the first, you will have a good idea of your net worth. The aim is to have more assets than liabilities. But don’t panic if your net worth is currently negative. If this is the case, you can set goals to work towards making it positive and then increasing it bit by bit.
The next six steps can help you to do just that.
This is really key. Unless you have a clear idea of how much money is coming in every month, and how much then needs to go out, it is impossible to keep on top of your finances.
If you end up overdrawing each month, it does not necessarily mean that your finances are in bad shape, but perhaps that you are not allocating the money you have in the best way. Your aim should be to get through each month, having paid everything you need to, with money still left in the bank.
So, making a realistic monthly budget that includes all your income and expenditure will help you to see whether you have enough money for your needs, or are living beyond your means.
Even when you have a budget, you need to track your spending. Budgets can look great and workable on paper, but you may still end up in a mess at the end of each month. So find a way to track your spending to see where you are spending more than what you have budgeted.
You can do this in a notebook or spreadsheet, but there are also some great apps around if you prefer. Check out Money Dashboard, Emma or Yolt; also check with your bank to see if they have their own budgeting app which you could link to your account.
Tracking your spending will help you to take your budget still further and ensure that you manage your money well from month to month. If you realise that you are constantly overspending in one category you can make an informed decision about whether to continue doing that, and move money from another category, or whether either your spending habits or level of income needs to change.
Debt is something that is particularly difficult to talk about, because we all assume that it’s only us that has it, and everyone else is ok. But most adults in the UK are in debt to some extent. It’s estimated that around £1,721 billion is currently owed in the UK, with average debt per household almost £62,000 (including mortgage).
When assessing the state of your finances, the key thing is to differentiate between good debt and bad debt.
Good debt could be described as debt that helps you to buy a major asset or achieve an important life goal, and which enables you ultimately to get back more than what you put in. So for example, a mortgage on a home, affordable car loan, student loan or business loan could all be seen as good debt.
Bad debt on the other hand, is debt that takes more than it gives. For example if you have a high credit card balance and are only making minimum repayments, you may well end up just paying off the interest each month rather than reducing the balance itself. This is bad debt because it weighs you down and, unless you take action, you will be stuck with it for quite a while.
If your level of bad debt is higher than you would want it to be, now is a good time to look at different ways of tackling that. For example increasing your income either permanently or temporarily, for example by changing jobs, doing extra work as a sideline, taking in a lodger, or selling some of your stuff.
In parallel with assessing your debt situation, it is important that you know your credit score. In our last article – Is taking out a loan ever a good thing – we explained the concept of credit scores. Every adult in the UK has a three digit credit score, allocated by one of three Credit Reference Agencies – Experian, Equifax or Transunion. Your credit score is used by creditors as part of their decision-making process on whether or not to lend to you.
Your credit score is also a helpful indicator of your financial health, but if yours is lower than you would like it to be, don’t panic. There are things that you can do to boost your credit score, including:
Many people have been able to save money during the pandemic, some for the first time ever. But recent research shows that around 20% of UK adults have less than £100 in savings, and the same number are not saving anything at all.
So if you are in either of those categories, you are not alone. But you will improve your financial health if you can start building some savings.
Many financial experts recommend that you try to build up savings equivalent to six months living expenses, so that you have the ability to handle any kind of unanticipated financial need without having to borrow money. And of course, savings can also enable you to enjoy the things that you want to do in life without worrying about the cost.
The best way to develop a savings habit is just to start doing it. Open a savings account today and set up a direct debit just to put a small amount of money in there every month. Treat it like any other bill. Once you get used to doing this, increase the regular amount whenever you are financially able to do so.
You can supplement your regular savings with any one-off deposits that you are able to make. For example, gifts, wins or bonuses. You may also want to create other savings opportunities around your home such as jars for loose change, or for money saved by not buying little luxuries. It’s good to set savings targets then get creative, and see how quickly you can meet them.
Every little helps, as they say, and before long you will see your savings start to grow.
You may be young enough to think that pensions are too far ahead to think about now. You have enough financial commitments as it is!
But as the state retirement age continues to increase, it really is worth having another pension plan in place, that will give you more flexibility in the future over when you retire and what kind of income you will have.
If your employer has a pension scheme you should already be enrolled in it. If not, check with them as soon as possible. A workplace pension is great news as your employer will contribute money – usually at least 3% of your salary – into the pension scheme, and you should also be able to make extra payments into it if you want to do so.
If you are not in a workplace pension scheme, you could take out a private pension instead. You can pay into this either on a regular or lump sum basis.
Whether you make additional contributions to a workplace pension or pay into a private pension, your payments will usually be eligible for tax relief. This is win-win: not only are you increasing the amount of your pension, but you are paying less tax, which offsets some of the cost of your pension contributions.
We hope that the above information helps you to make a realistic assessment of the health of your finances, so that you can start to make changes in those areas where improvements are needed.
Check back here soon for more finance and lifestyle tips from Munzee Loans.
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