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Don't panic, we've got this

The basics of financial planning

Sarah Pennells

Sarah Pennells

Virgin Money mentor, money expert, broadcaster and author

Financial planning. What do those two words mean to you? And how do they make you feel? You may love the idea of sorting out your finances, but – let’s face it - many of us don’t! It can be confusing, the language is often complicated and it’s not always obvious where to start.

However, it is worth doing. Having a financial plan can save you money in the long run – sometimes a lot of money – and it can also mean you spend a lot less time worrying about your finances. So here’s where to start – the real basics of financial planning.

Step 1: Work out your short, medium and long term goals

In order to have a plan that works, you need to know what you’re planning for. So, grab your mobile phone, tablet, computer or a piece of paper and a pen and draw up three lists: short term (the next five years), medium term (five to ten years) and long term (ten years plus).

  1. Write down what you’d like your money to help you achieve. Create a list of money goals.
  2. Put your short, medium and long term goals in order of importance. So in your short term goals, maybe you want to pay off your debts or be able to go on holiday and not return to a large credit card bill? Or perhaps you’d like some savings so you won’t panic if your car won’t start?
  3. Now you’ve done that, have a think about where you can free up money to put towards your goals. Don’t worry if you have more goals than you have spare money! You may have to review your goals or make cutbacks to help you reach them. We’ll work on this in step 2.

You’re now ready for the next step. In this article, I’m going to focus on financial planning for your short term goals – I’ll return to long-term goals later.

Step 2: Know where your money goes

The phrase ‘draw up a budget’ can be a bit off-putting. Frankly, it sounds rather dull and time consuming. But it’s really about knowing where your money goes and what you have left once the bills have been paid. You’ll need to make a note of your income (wages, earnings, benefits etc.) and what you spend it on.

There are lots of apps and websites with free budgeting tools (there’s a budget calculator on Virgin Money), or if you’re a fan of a good spreadsheet, you can use that.

A useful part of this exercise is that you can see what you’re spending your money on. Chances are it’s more than you think on the ‘little things’ such as coffee, food on the go, takeaways and treats.

And once you can see where your money goes, it’s easier to work out where you can save some cash. Any spare cash will help with step 3.

Step 3: Pay off your debts

If you owe money on a credit or store card, your priority should be to pay them off using the spare cash you’ve identified. That’s because you’ll save money on interest payments. The only exception is if you have a 0% balance transfer credit card. In that case, you should pay it off by the time the 0% deal runs out.

SARAH’S TIP: You may be able to become debt free quicker than you think. The most effective way of paying off these debts is to pay as much as you can afford to the debt charging the highest interest rate. The interest rate will be on your credit card or loan statements.

So, if you owe £400 on a store card charging 29% and £1,500 on a credit card charging 18%, you should pay the minimum on your credit card and as much as you can to the store card debt. Once you’ve paid it off, add the money you were paying to the store card to the monthly amount you were paying your credit card company, and pay this every month until your credit card balance is zero.

If you have any loans, you could use the money you were paying your credit card towards clear them faster.

SARAH’S TIP: If you took out your loan after 1st February 2011, you’re able to overpay by up to £8,000 a year with a maximum penalty of 1% of the amount you’ve overpaid. Check with your loan provider as to whether you can make monthly overpayments or whether you have to do it once a year.

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 in £££ from switching.

SARAH’S TIP: 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. From the autumn of this year, all banks are due to 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. But some will let you use data from your own bank account to compare deals.

It’s a government backed initiative called ‘Midata’ where you can export your last 12 months’ transaction history from your online banking and load it into the price comparison site. Your file won’t include your name, full bank account number or sort code, and some information about transactions will be blanked out.

SARAH’S TIP: My advice, when you’re choosing a current account, is not to focus too much on any cash incentive. I think interest rates, good service and user friendly, yet secure online and mobile banking are more important than a one-off cashback payment.

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 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! Choose an easy access or notice account, so you can get at your money in an emergency.

SARAH’S TIP: 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.

Choose an account paying a good interest rate, but don’t stress too much about the rates when you start. It’s important to have a savings account that makes it easy for you to save and hard for you to spend your money so you build up your savings.

If, for example you save £100 a month for six months in an account paying 1.1% interest (the best buy on easy access accounts, as I write this), you’ll earn the princely sum of £1.93 in interest (yay!). If you saved in one of the worst accounts (paying a measly 0.05%), you’d have 9p in interest. OK, so it’s a bit of an insult, but the biggest benefit will be that you’ve not spent the £600.

SARAH’S TIP: Once you’ve got into the savings habit, it’s time to shop around. By then you should be used to setting money aside. Definitely do it once you’ve saved £1,000. I always check at least three different price comparison sites and select ‘show me all accounts’ to make sure I don’t miss out on any deals.

In terms of how much to save, I’d say that as a minimum is enough to cover things like paying for your family holiday, your car to be MOT’d, serviced and repaired, and a bit extra. If you’re self employed, you should save more so you don’t panic every time a client pays you late.

If you can save enough to cover your living expenses for a few months, that’s fantastic! But don’t set yourself this goal at the beginning if it will put you off. It’s better to set smaller and more achievable goals as you’ll be more motivated to carry on.

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 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 life insurance.

SARAH’S TIP: If you’re employed you’ll probably have life insurance through your work (it’s called 'death in service' benefit). But it may not be enough.

Talk to a specialist protection broker. They will help you work out how much life and income protection insurance you need and which company has the best policy for you.

Here’s a reminder of the steps to take:

  1. Work out your goals
  2. Know where your money goes
  3. Pay off your debts
  4. Sort out your current account
  5. Build up some savings
  6. Make sure you’re protected

Do all of these six steps and you’ll feel more in control. You’ll be ahead of the game with the basics of your finances well and truly sorted.


Links to external websites are for information only. Virgin Money receives no income from them and accepts no responsibility for the website content. The information in this article is correct as at 08 March 2017.