Taking those first steps to tidying up your finances can seem like a daunting task. Pairing a drawer of odd socks or defrosting the fridge – or in fact anything else – might be more tempting. But once you’ve got the basics of your finances under control, you can save for specific goals, shop around for the best products, and make your money work that much harder. Best of all, you can relax a bit more easily, knowing there are likely to be fewer nasty surprises around the corner.
But before we get to the nitty gritty, sit down and consider what you would like to do in the future. Do you want to buy your first home, for example, or plan for retirement? Do you dream of being your own boss, or taking a mid-career gap year to travel the world? Having one or more specific goals can be a great motivator.
“Without that clarity, it’s much harder,” says Anna Sofat, managing director of wealth management firm Addidi. “And even if you don’t have a specific savings goal, you might just want to make your money more efficient”.
Close those dormant accounts
One of the simplest actions you can take is to close all those old current accounts that you haven’t used for years. You may have signed up for various accounts that looked attractive to you when you were younger, but as the years have rolled by you may have been drawn to more alluring rivals.
Closing down the dormant ones could not be easier, thanks to the Current Account Switch Service (CASS). It does all the boring admin for you, within seven working days, no fuss, no fees, no hassle. All your direct debits and standing orders are transferred across for you, and there are guarantees in place that mean any payments into your old account will follow you to your new account for the next three years. And there is no limit to how many switches you can do.
Paying off debt
A top priority is possibly among the most daunting – look at what you owe, and pay off high interest debt as quickly as you can. A common trap is making only the minimum repayments on your credit card. As the Money Advice Service, an independent body, says: if you only make the minimum payment, it’ll take a long time to pay off your debt and you’ll end up paying a lot more than you borrowed. To understand interest rates, check out our blog.
There are various ways to tackle debt, including setting up a repayment plan, transferring the credit card debt to another provider with a lower interest rate – aka a debt balance transfer – or speaking to a charity such as Citizens Advice.
If you have student debt, it’s worth investigating how much you owe and what the interest rate is. Since I graduated in 2011, I have a relatively low rate (interest rates increased for students post-2012) and don’t need to make early repayments – although now that I earn more than the threshold, the interest will build up if I don’t make any repayments at all.
Our grandparents gave us sage advice, which we laughed at when we were 10-years-old but are kicking ourselves for not following now. One was, “don’t spend it all at once”. It’s time to work out your incomings and outgoings, and what your priorities are.
“There are only two ways of growing your wealth and being financially free: you either create wealth, or you save and invest,” Anna says. “So, if you’re looking at earning and taking care of yourself, you need to get your budget right, no matter how painful that is”.
Looking through your account and making a simple weekly or monthly list of money in and money out can help you understand what you spend and where you need to cut back. With Starling, all outgoings are categorised and you can update these to make them work for you so you know exactly what you’re spending on bills or travel or eating out. There are plenty of budgeting tools out there to help, such as this one from the Money Advice Service.
Are you putting 5 to 20% of your income into your savings? Don’t run away with your hands over your ears. This is what financial advisers recommend. But you can always start with a lower amount. The key is to get into the habit of saving, no matter how small the amount. And then regularly review it.
“I would set aside three months’ worth of normal expenditures for an emergency fund,” says Julie Lord, chief executive of Magenta Financial Planning. “Then sit down and really challenge yourself: what are your short, medium and long-term goals? Think about how you can achieve these things, and consider multiple savings pots”.
Having a buffer means you can account for those “what if” scenarios, such as your washing machine blowing up or needing some time off work. At Starling, our Goals feature on our app means you can put money aside without having to open a separate bank account.
There are many savings accounts on the market, so compare them for the best interest rate. Some current accounts also pay interest. Starling’s personal current account currently offers 0.05% AER up to £85,000.
Check your credit score
It might sound a bit Big Brother, but everyone has a history, and your loan provider knows about it. Whether you’ve not paid a phone bill or been rejected for a credit card in the last few years, this can affect how likely a financial company will be to lend you money.
To improve your credit score, try to make payments on time, make sure you are on the electoral register and update all correspondence to your current address if you move house.
Several providers now offer credit score checking services for free, and it won’t harm your score to look at it.
Investing is not just for unhinged gamblers à la Wolf of Wall Street. Once you have that cash buffer built up in a savings account and you are ready to part with the money for at least five years, you can put your money to work in the stock markets. “Apps such as Moneybox get you into the habit of saving and with Wealthify, you can start investing with as little as £1, so there’s no excuse not to make savings of some kind,” says Julie. But remember, with investments the value may go down as well as up. That’s why it makes sense to invest over a longer period rather than see it as a way to get rich quickly. And you should seek to diversify and spread the risk, so all your eggs are not in one basket.
You can also put up to £20,000 per year in cash and stocks and shares ISAs, and any gains or interest you make will be free of tax. Another handy place to park your money is in premium bonds, which you can buy from £100. They are also tax free and offer slightly higher interest rates than a typical bank. Your pension is also an investment. Thanks to the auto-enrolment scheme, your employer contributes at least 2% of your salary and you put in 3% - the minimum pension contributions will rise to 3% and 5% respectively next year.
“It’s always a good discipline to do a bit of financial housekeeping every year, looking at what you have, how far you’ve got, and where you thought you would be,” Anna says. If you want to learn more about this, check out our pensions blog.