Do you ever have a panic about money? If so, you’re not alone. Recent research by Virgin Money indicates that 88% of UK adults are regularly kept awake at night due to money worries.
Many of these worries are about their current financial situation, particularly the cost of living. But future finances are also of concern to many people.
Even if you are just about managing from month to month, you may not really be sure how healthy your financial situation is overall. For example, how do your finances compare with those of your friends and family? And when you start to think about the future, can you ever envision a time when you will truly be comfortably off financially?
If all this sounds horribly familiar, it can be helpful to sit down in the cold light of day and take a detailed look at your finances to get a realistic picture of how healthy or otherwise they are, and what changes you may need to make.
In this article we take a look at how to get a better understanding of how you are doing financially. We’ll do this in three parts : Past, Present and Future.
Nothing can change what has happened in the past. But past events may still be impacting your finances, so you need to come to terms with this and deal with any consequences that are still causing problems.
Two of the most common results of past financial problems are bad debt and a poor credit score. Let’s take a quick look at each of these:
If you are in debt, it can feel like a very lonely place. We all assume that everyone else is ok financially, and no-one else is struggling with debt. But the average UK adult has £4,269 of unsecured debt i.e. loans and credit cards.
Unsecured debt such as loans and credit cards can be regarded as “bad debt”. This is debt that is weighing you down and is taking time to repay. It is debt that is no longer paying for anything useful, but the monthly debt repayments are badly impacting the amount of money you have left for essential spending, which can lead to you building up more bad debt.
If you have bad debt, you need to understand how this has happened, to avoid it happening again in future. And you need to make it a priority to get your bad debt paid off as soon as possible, even if this means taking on extra work or making other lifestyle changes to get it sorted.
On top of bad debt you may also have what could be regarded as “good debt”, for example a mortgage or car loan. Whilst no debt is actually good, a mortgage or car loan is a regular payment that is going towards an asset that will gradually become yours. So in that sense it can be a positive thing. The average total debt per UK household – including mortgages – is £65,515.
If you have bad debt, you are also quite likely to have a poor credit score. 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 an indicator of how well you manage your money, and is used by financial organisations to assess whether you are likely to be a reliable person to lend money to.
It is helpful to know your credit score, and if it is lower than you would like it to be, there are things that you can do to start increasing it again. The first place to start is to ensure that there are no errors on your credit report such as your current personal and financial information, or any links to other people (for example previous partners) that should no longer be there.
But the main way to improve your credit score is to ensure that from now on you pay all your bills and loan/credit card payments in full and on time. And try to gradually bring your overall level of debt down to under 25% of your current available credit.
A useful barometer on how healthy your finances are is to calculate your current net worth.
To do this, make one list of everything you own – for example your home, car savings, and bank account. These are known as your assets. Then make a second list of anything you owe, and how much. For example, mortgage, loans and credit cards. These are your liabilities.
Your net worth is your assets minus your liabilities. Ideally your assets should outweigh your liabilities, but for many of us this is not yet the case. However, there are steps that you can take to build up a positive net worth, and move forward to a healthier financial future.
Two of these steps are making a realistic monthly budget and starting to track your spending:
It is essential to make a realistic monthly budget so that you have a clear idea of how much money is coming into your household every month, how much money is going out, and where it is actually going.
It’s estimated by the personal finance company Nimblefins that an average UK household spends around £625 per week – £2,700 a month – on living expenses including housing, food, clothes, transport etc. These costs could be even higher depending on the amount of rent or mortgage you pay.
At the same time, the latest government data reveals that the average UK weekly wage pre-tax is £693 which equates to a monthly pre-tax salary of almost £3000 and an annual pre-tax salary of about £36,000.
Based on these figures, money is tight for many UK households and creating a realistic budget will help you avoid overdrawing each month. So take time to create a budget that takes into account all your income and expenditure so that you can see clearly how your money is being allocated.
As well as creating a budget, you need to track your spending carefully, especially for the first few months. This will help you to understand how accurate your budget is : there may well be areas where you are spending far more than you expected.
The best thing to do is to record every single thing you spend. This can sound very tedious, but once you start it quickly becomes a habit. Whether you do it in a notebook, on your phone’s notepad, or using an app such as Snoop, Emma or Moneyhub, it will enable you to see where your money is really going, and where you may need to make some changes.
Two of the key things that can help you start to feel more hopeful about your future finances are savings and pensions:
Building up savings is important both for the unfortunate twists and turns of life – such as family or medical emergencies – and for happier life-changing events such as weddings, home moves, and new babies.
But recent research by the FCA (Financial Conduct Authority) suggests that around 18% of UK adults have less than £5,000 in savings, around 33% less than £1,000, and another 30% of people in the UK have no savings at all.
So if you have little or no savings, now is the time to start saving. This may necessitate revisiting your budget and choosing to remove some non-essential expenditure from it in order to start building savings instead. Then open a new savings account and set up a direct debit to put a small amount of money in there every month. Treat this direct debit like any other bill : once it’s paid, think of it as gone and don’t be tempted to get it back again to spend on something you don’t really need.
Once you get used to saving, you can boost your savings by gradually increasing the regular monthly amount when you are able to do so and/or making occasional one-off deposits, for example with gifts, wins or bonuses.
Another great way to boost your future finances is through a pension. The state retirement age continues to increase, so if you have a workplace pension it really is worth considering paying more into your pension scheme through AVCs (Additional Voluntary Contributions) if you are able to do so. Not only will this increase the final value of the pension, but you will get tax relief on the payments, as pension payments are taken out of your salary before tax.
Whether or not you have a workplace pension, you may also want to consider a private pension. You can pay into this either on a regular or lump sum basis, and will get tax relief on the payments. A private pension – even a small one – could enable you to retire early as you can currently take it from age 55 (rising to 57 in 2028).
We hope that the above information helps you to understand how healthy your finances currently are, and give you some tips on what to do to get things into a better position.
Remember to check back in with us here again soon for more financial and lifestyle tips from new direct lenders Munzee Loans.
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