Would you rather do almost anything than get stuck into some serious financial planning? Don’t worry, this is how most people feel. It’s the sort of task that leads to dilly dallying on an industrial scale. But it doesn’t have to – follow my step-by-step guide to the basics and you could end up saving money and spending much less time fretting about your finances.
Step 1: Work out your goals
To make a plan that works, you need to know what you’re planning for. So start by drawing up a list of goals you’d like your money to help you achieve over the next five years.
Now rank your goals in order of importance. Maybe you want to be able to go on holiday and not return to a large credit card bill? Perhaps you’d like to invest some money in doing up your house? Or you’d like to buy a new family car?
Step 2: Know where your money goes
Before you can get back to daydreaming about what you’ll spend your money on, you need to know where it goes and what you have left once the bills have been paid. Use a free budgeting tool (Virgin Money have a budget calculator) to break down your income (wages, benefits etc) and what you spend it on.
A useful part of this exercise is that you can see exactly where your cash goes. Chances are you’re spending more than you think on the 'little things' such as coffee, takeaways and treats.
And once you can see where your money goes, it’s easier to work out where you can save some cash, which will be important for step 3.
Step 3: Start to pay off your debts
If you owe money, your priority should be to start paying it off using the spare cash you’ve identified. Prioritise your debts and start tackling those carrying the highest level of interest payments. If you are worried about the level of debt you have, take a look at our article ‘Where can I get help with debt?’.
Step 4: Get the right current account
You may have been with your bank for years but that doesn’t mean it’s the right current account for you. If you’re regularly overdrawn or you’re often in credit by several thousand pounds, you have the most to gain from switching.
Many people who regularly use their overdraft don’t switch because they’re worried that they won’t get the same overdraft limit with the new bank. That should change as banks will soon tell new customers how much of an overdraft they’ll get before they switch.
Several price comparison sites let you compare current accounts based on being £500 overdrawn or £1,000 in credit. And some will even let you use data from your own bank account to compare deals, through the ‘Midata’ scheme.
Step 5: Build up savings
Once you’ve paid off your debt and sorted out your current account, it’s time to build up some savings.
The most important thing is just to get saving. Set up a standing order so a regular amount goes out from your current account. Don’t wait until the end of the month and promise to transfer what’s left over – the chances are you won’t ever do that. Choose an easy access or notice account for your deposits, so you can get at your money in an emergency.
With a notice account you will lose some interest if you take money out without giving enough notice. But if you’re likely to be tempted to dip into your savings, it may be a better option than an easy access account.
An alternative could be a limited access account. Limited access accounts work like other savings accounts, but in return for limiting the number of withdrawals, you should receive a higher rate of interest than a typical easy access account.
Step 6: Make sure you’re protected
Don’t ignore insurance. By law you have to have third party insurance for your car and your mortgage lender will ask you to get buildings insurance if you have a mortgage (unless you live in a leasehold flat). You don’t have to get contents insurance but I think it’s worth it.
Income protection is useful and not to be confused with PPI (Payment Protection Insurance). It pays you a percentage of your wages or earnings if you’re too ill to work and you can sometimes buy it via your employer.
One form of insurance that’s often overlooked is life insurance. Not everyone needs it but if, for example, you have a mortgage with someone else, you have children or you would struggle to manage without your partner’s salary, you need to get this.
Step 7: Breathe easy!
Follow the six points above and you’ll soon start to feel more in control.
Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.