Financial health isn’t just a subject that’s close to our hearts at Starling. Empowering people to improve their financial well-being is central to everything we do – in fact, it’s why we were so passionate about building an entirely new kind of bank in the first place.
It certainly feels like the right time for a product like Starling. Open any newspaper and, beyond the news pages but before the sport, you can be sure of finding one of two types of special sections or supplements. Sometimes you’ll find both. One will be called something such as “Your health”, while the other will be named “Money matters”, or similar.
It’s an intriguing thought, but what if the two were to be merged somehow, creating a guide to good financial health?
Let’s think about what sort of advice it would offer. We all know (or think we do) what the health supplements have to say: eat lots of fruit and fibre, take regular exercise, lay off the chocolates. And the personal finance sections are packed full of urgings to make full use of your ISA allowance, to refinance your mortgage at a more favourable interest rate, to switch energy suppliers in search of lower bills. But what would be the advice of a financial health supplement – and how are the features we’re building at Starling providing a ‘cure?’
In sickness and...
So we’re focused on helping people to improve their financial health – but what does financial well-being look like exactly? In answering that question, it may be easier to describe what it does not look like, as in this report from the Daily Mail on October 19, 2017:
“More than four million people are living on the brink of financial meltdown, a major report revealed yesterday.”
The biggest study of the state of the nation’s finances by the City watchdog [the Financial Conduct Authority] found vast numbers are struggling to get by every month and would be pushed over the edge by unexpected bills or losing their job.
Ill-health in financial terms could be summarised as having inadequate savings combined with expensive credit (such as payday loans) while at the same time assuming that current household income will suffer no interruptions.
In that regard, financial health (and sickness) is akin to physical health. Low or no savings, costly borrowings and ineffective worrying about future earnings are the equivalents of little or no exercise, unhealthy food and an assumption that the body will continue functioning properly pretty well indefinitely.
A question of incentives
So, financial health simply equals saving more, borrowing less and taking steps to guard against a rainy day? Well, that’s not a bad place to start. As Warren Buffett said when asked whether his investment philosophy was not a little obvious – everyone knows that eating less and better food will help you lose weight, but there are still dozens of new diet books published every year!
But it is about much more than that. One way of defining financial health would be to say that an individual’s incentives are aligned with good financial outcomes rather than bad ones. An example would be saving for a specific goal and keeping that goal firmly in view – which was why we decided to build Goals, a place for you to set aside money for the things you really want. Another could relate to a rainy-day fund, with each sum contributed triggering a new calculation as to how many weeks or months the household could survive loss of pay.
Everyone’s idea of financial health will be a little different from that of everybody else, but the basic principles hold good for all. And the first principle is simply this: you need to find out where your money is going.
Borrowing again from the diet-book analogy, there is little point drawing up well-meaning, detailed eating plans if you have no idea why the weight seems to be piling on. Similarly, financial health starts from a thorough review of where every pound is spent, in detail. That means listing actual goods and services purchased, not cramming various items together under vague headings such as “housekeeping”.
At one end of the scale, such a review would be almost certain to identify waste and duplication, with unnecessary purchases of the same or similar items, and cash running away in magazine and membership subscriptions that ought to have been cancelled years ago, but weren’t. One of our most popular features is Spending Insights, which gives an overview of your spending by category or merchant so you can understand exactly where your money goes (and adapt accordingly!).
Plugging the leaks
At the other end, your review ought to mean no hiding place for those insurance and breakdown policies and similar whose providers have been quietly bumping up the price, year on year, while your attention was elsewhere.
Then there are those leaks that we create for ourselves, such as late payment penalties and interest incurred when credit-card and other accounts slip, however briefly, into arrears. Good organisation is an essential aspect of good financial health, which is why we created our Overdraft Calculator – so you can compare the overdraft market easily and make the right decision for your current situation.
The aim of the review exercise is not to save money, as such. It is to identify “money leaks”, which are one of the great enemies of good financial health.
With the leaks stopped up – including, if appropriate, taking that corrective action on mortgage refinancing upon which personal-finance journalists are so keen – the next step is to look at the other side of the equation: not what you are spending but what you should be providing for.
The biggest and most obvious event is, of course, retirement. That British people are, on average, making inadequate provision for later life has been the common currency of discussion for years. Is it ten million people who face poverty in retirement, or is it 12 million? Estimates vary. One thing’s for sure: it is a very large number.
No household without proper financial provision for life after work can be said to be in good financial health, regardless of whatever else is undertaken by way of savings and investment. It is estimated that, on average, a retired person will need the equivalent of two-thirds of their final salary to live comfortably in retirement.
The first step to this aspect of financial health is to get a full overview of all the pension plans to which you belong. The Government’s new “pensions dashboard” should prove a great help here, but closer to home we’ll also be exploring the world of pensions in greater detail here at Starling soon. We think it’s an area that’s woefully under-discussed in the realm of personal finance – and that’s something we plan to change.
How long is a rainy day
If it seems that your retirement income will fall short of your needs, then you need to take corrective action and save more. Should retirement be imminent, then you may well have to work beyond pensionable age in some capacity or other.
Pension planning is the longest-range type of saving, but good financial health requires also a different type of provision, not against something that will happen, in this case retirement, but something that may happen. The desirability of putting money aside for a rainy day is a piece of folk wisdom that too many of us seem to have forgotten as millions of families live, as the Americans put it, one paycheque away from the poorhouse.
We discussed the concept of a rainy day fund on our blog recently, exploring the difficulties people encounter when trying to save for one. How much rainy-day money do you think you should have? That depends, in part, on how long you think you could survive a financial shock such as loss of employment or prolonged illness. The equivalent of month’s household expenditure is a fair buffer, the equivalent of three months’-worth is obviously better still.
Not all saving ought to be seen as being all about guarding against unpleasant events such as a poverty in old age or unemployment. Shorter-term saving is ideal for putting money aside for…well, anything, really. A holiday, a car, a house extension or anything else that is important to you and that is realisable once the above mentioned money leaks have been stopped up and a good savings habit has become second nature.
Two certainties in life: debt and tax relief
Finally, one enemy of good financial health – and one ally. The former is expensive credit, potentially the largest money leak of them all. Costly credit too often is consumer credit, whether on cards or loans. Getting debts under control and transferred to lenders with lower interest rates is a key aspect of financial health.
Which brings us to the friend of good financial health – tax reliefs of various sorts, including those available on Individual Savings Accounts and the new annual Personal Savings Allowance. Make sure you are taking full advantage of all the reliefs open to you.
Good financial health is not about being mean or miserly. It is not even primarily about savings, although they have a central part to play. Good financial health is about organising your resources in such a way as to allow you to pursue and achieve your goals while ensuring a reasonable degree of financial security. It involves putting your funds to the uses that you value and preventing them leaking away on things that you do not.
We are driven by the belief that good financial health is about living well. It is as simple as that, and it’s our mission to help you achieve this.