Accountant Danny Cox gives his tips on how to secure your financial future
1. Spend less than you earn. It may sound simple, but this is crucial. If money is tight, use a spending diary and monthly budget to help you focus on keeping your costs down.
2. Minimise your debts. You cannot avoid borrowing money at various stages of your life, particularly for a house purchase. However, it is easy to overextend borrowing or not allow for increases in interest rates or other changes in circumstances. The cost of debt, especially expensive debt such as overdrafts, credit and store cards, limits your ability to save and build wealth. Ideally you should clear your debts as soon as possible. In practice, most people save while they still have a mortgage but only if the repayments are under control.
3. Protect against the loss of your earning power. Perhaps the biggest risk to your financial security is accident, illness, death or redundancy. The easiest way to do this is through insurance but take into consideration the benefits you or your beneficiaries would receive from your employers, e.g. death in service payments. Plus arrange for a professionally written Will to ensure the right people benefit from your estate.
4. Set aside an emergency fund of at least six months’ expenditure. This cash cushion should be held in an immediate access bank or building society account. As you approach retirement, your emergency fund should be increased, between 10% and 25% of your liquid portfolio (cash and non-property investments) is common.
5. Plan ahead and set goals. ‘If you are planning for a year, sow rice; if you are planning for a decade, plant trees’- a Chinese proverb. Many people spend more time choosing and arranging their annual holiday than they do on their financial plans. Planning ahead will help you make the right financial decisions, make more of your money and match the right approach with your goals.
6. Start saving for retirement. Join the NHS pension scheme at your earliest opportunity as the earlier you start, the higher your pension income is likely to be. Despite proposed changes, is still one of the best pension schemes in the UK.
7. Complement your pension savings with other forms of saving. Have a set amount taken from your account the day after you are paid to ensure your savings build every month, avoiding the problem of having nothing left to save by the end of the month. Consider an ISA if you don’t have one.
8. Reduce the costs of investing. Buy your ISA or other investments through a fund supermarket and you will save up to 5.5% in initial charges – £587 on a £10,680 ISA subscription. Over 10 years the difference in value between an ISA with a full saving and one with no saving is around £1,050 (assumes 6% growth).
9. Beware of inflation. Unless your savings grow at least as fast as the rate of inflation, your money will buy less in future than it can today. Most cash savings fail to keep pace with inflation, so hold some cash and invest the rest. Historically, the stock market has had the best potential to provide inflation-busting returns over the long term, although the value of investments can fall as well as rise and past performance is not necessarily a guide to the future
10. Minimise tax: reduce the amount of tax you pay by making full use of you and your spouse’s allowances and tax breaks, and your disposable income and investment returns inevitably should be higher. Please note tax rules are subject to change and the value of tax relief depend upon your circumstances.
Danny Cox is head of advice at Hargreaves Lansdown. For free tax saving tips and investment ideas go to www.h-l.co.uk/pulse
10 steps to financial security