At this time of year it is customary to write on topics involving planning and looking to the future. Whilst advisers tend to like writing on investments, I think there’s probably not enough advisers writing or providing education on the topic of personal finance. Young people at school and colleges are particularly poorly served in this vital area of education
Here’s a list of fifteen personal financial planning rules of thumb:
1. Salary is not the same as savings. It’s not about how much money you make, it’s about how much you keep. It’s amazing how many people don’t understand this basic truth. Having a high salary does not automatically make you rich; having a low salary does not automatically make you poor. All that matters is how much you save out of your salary, and consistently saving and investing from an early age will allow that money to benefit from long-term investing and compounding.
2. Live within your means. The best way to get ahead financially is to keep a close eye on your spending and spend less than your net earnings.
3. Saving is as important than investing. Paying yourself first is such simple financial planning advice, but so few people do this. One of the best investment decisions you can make is setting a high savings rate because it gives you cash cushion to fall back on in an emergency and also the ability to make long-term and investment decisions.
4. Avoid credit card debt. Credit card debt is a great way to negatively compound your net worth.
5. You do need credit, but manage it well. One of the biggest expenses over your lifetime will be interest costs on your mortgage, car loans, student loans, and so on. Having a good credit score can save you money by lowering your borrowing costs. so it is okay to use credit cards, but always pay off the balance each month.
6. If you want to understand your priorities look at where you spend your money each month. You have to understand your spending habits if you ever wish to gain control of your finances. The goal is to spend money on things that are important to you but cut back everywhere else. And if you pay yourself first you don’t have to worry about budgeting, you just spend whatever’s left over.
7. Automate your payments. The best way to save more, avoid late payment fees, and make your life easier is to automate as much of your financial life as possible. There are many good online budgeting tools, and it probably takes up less than a hour a month to keep on top of everything, because it’s all on autopilot.
8. Get the big purchases right. Interest rates have been at a all-time low for some time, and it can be easy to get carried away buying that ‘must have’ house that has just come onto the market, or the latest new car to impress your friends. You can however find that within weeks it becomes just another car to you – but you’re stuck with payments. Overextending yourself on these big ticket items can be a killer, and can seriously dent your plans for achieving Financial Freedom.
9. Make sure you maintain your savings. You need to have liquid assets to take care of things when life inevitably gets in the way. The last thing you want to do is cash in long-term assets to meet short-term needs.
10. Ensure you have good insurance in all areas of your life. It’s usually worthwhile getting good cover, or an unwelcome problem can hit your saving plans – usually at the wrong time. Also, it is always worthwhile to regularly check whether you can get the same cover cheaper on online comparison sites.
11. Always get the match from your company pension scheme. People often don’t maximise saving into their company pension when they are eligible for the employer to match their contribution. That’s like turning down free money.
12. Choose your friends and neighbourhood wisely. Whether we are aware of it or not, we may copy the actions of others to gain acceptance. Trying to keep up with spendthrift friends or neighbours is a never-ending game with no true winners. Lifestyle creep is also something to be wary of.
13. Material things won’t make you happier in the long run. There is a short-term hit we get through retail therapy but it all wears off – and quickly. Buying stuff won’t make you happier or wealthier.
14. Read about personal finance. There are many personal finance books and websites out there. There isn’t much excuse to at least make a start to get this right. This stuff should be taught in every school and college, but sadly it isn’t. This means you have to take initiative.
15. Taxes matter. Take advantage of the tax breaks available to you – like Isas and pensions, and ensure you understand your personal tax situation.
All these methods are proven ways of building your financial future, whilst also avoiding some common pitfalls that can undermine your best efforts. Act now and call or email our office if you want any further information or to book a complimentary initial meeting.