Take your money to hero status - expert know-how from a financial planner
With training, anyone can conquer their financial foes. Here’s how to develop your money superpowers.
By Warren Shute, financial expert and author
Not all heroes wear capes… and that’s certainly true when it comes to saving your finances.
I’ve been a financial planner for more than 25 years, and in that time I’ve developed strategies that can help anyone, regardless of what’s in their bank account.
I’m on a mission to help people get financially organised by sharing tips and tricks that can help, whether you’re a millionaire or just trying to make ends meet. Here are some of my favourite hero moves to get your money where you want it to be.
Look into the future….
Without clarity, you’re powerless. If you know where you’re going, you’ll be more excited about the journey. Start with a long-term vision, say 20 years from now, and then split it into smaller steps: where do you want to be after 10 years, five years, three years, one year?
Then, break your 12-month plan down into 90-day check-ins. What do you need to do in the next three, six, nine months to stay on course? If you’re not sure, then do your research. You’re here, which is a great start.
Suddenly your vision is achievable. Why? Because you’re going one step at a time.
Savings. But simpler.
Manage all your cash savings in one place.
Harness the power of organisation
Every hero needs a plan. Yes, it’s time to get financially organised.
First, get to know your new sidekick ‘ALIE’ – that’s your assets, liabilities, income and expenditure.
Then, get a grip on your money with this bank accounts system:
- Set up two accounts, one for bills and another for personal spending.
- Arrange all your regular payments to come out of your bills account. Be honest with yourself and ask three questions of each: do I need this, do I want this, can I get it cheaper?
- Put some WAM (that’s ‘walk about money’) into your life. That means using the money in your personal spending account to pay for all your weekly variable spending like groceries, drinks, haircuts etc. Work out how much you need (or have left) to spend in a month after your bills, divide it by four, that’s your weekly WAM.
- Set up a payment once a week for this amount from your bills account to your spending account.
- Your WAM is your allowance – it’s finite. Don’t dip into your bills account for more.
This system gives you boundaries that stop you overstretching: if you can’t afford something, save a little of your WAM each week until you can.
Shelter from the storm
People talk about saving for a rainy day, but it’s more likely to be a deluge if something goes wrong. Protect yourself by saving three to six months of your expenditure in an emergency reserve account – something like Premium Bonds or a cash ISA – so that if the worst happens, you’ve got a back-up plan.
Even if you’re in debt, save up £1,000 as quickly as you can to provide some cover.
Something tingling – it’s your financial security senses
Like a “spidey sense”, but better for your bank balance. After your emergency cash fund, there are seven further financial foundations – two of which are essential, and the other five are definitely worth thinking about.
The ones most people need are a will and a lasting power of attorney. And it really doesn’t matter what age you are. Anyone can have an accident, and 2020 showed that none of us know what’s coming. Especially if you have children. Should the worst happen, without a will your kids could spend some time in limbo when they need stability the most.
The five optional insurances you could consider are:
- General insurances, such as buildings and contents
- Life insurance
- Income protection
- Critical illness cover
- Private healthcare
Everyone's personal situation is different and you may or may not need all of these. But it's worth looking into them to see if they're right for you.
Slash your debt like a sharp-knuckled hero fighting off a baddie
Harness the superpower of momentum and recognise that sometimes psychology is the most important factor to combat debt.
You could list all your debts in order from smallest to highest amount. Put all the money you have left over each month after expenses and making your minimum payments towards your smallest debt. When that’s paid off, start on your next smallest, and so on until you’re debt free.
Why? Because every time you clear a debt, you’ll feel good, you’ll feel motivated and you’ll want to slash the next one even more quickly. Mindset matters.
Another way to tackle your debt could be to pay off your highest interest-rate debt first. If you're struggling with managing your money and need some support on what to do next, organisations such as Stepchange, National debtline and the Money Advice Service should be able to help.
Your secret weapon: compound interest
The best time to hammer down your savings habit is yesterday, the second-best time is today. The sooner you start, the sooner you tap into what Einstein called the eighth wonder of the world, compound interest.
Compound interest is simply where you earn money on money. So let's assume what would happen if interest rates stayed at 10%. If you have £100 and it grew by 10% you’d have £110, then if the £110 grew by 10% the following year you’d have £121 and not £120 because you earn 10% on £110 in year two. After 10 years you could have £259 and 30 years later, you could’ve reached £1,745, all from the original £100. From small acorns grow strong oak trees. Remember, this is just to give you an idea of how compound interest works – it doesn't include how inflation would impact your savings.
Don’t be a daredevil when it comes to investing…
Good investing means diversifying and investing over time. If you need your money within five years, and I believe even seven years, then you shouldn’t be putting your money in the markets. That’s because investment is all about long term goals.
There’s a rule of 72, which will tell you how many years it could take for your money to double. Here’s an example – holding your money in the bank or building society at 1% per year, which you may think is safe, could take 72 years to double your money. But putting your money in a global index stock market fund, which let’s say returns 8% per year, could see you double up in just nine years.
Of course, there’s risk involved. There’s always a chance you could get back less than you invested. But as long as you invest for the long-term, you could be rewarded for your participation in the stock market.
You should also make sure you’re mitigating your risk by spreading your money. Avoid buying shares in just a few companies: I recommend using a global tracker or passive fund, which will spread your investments internationally and across different companies and sectors. That way, your future finances aren’t depending on the performance of one or two businesses.
However you choose to invest, it's important to remember your money is at risk and you may get back less than invested. So take time to do your research and get some financial advice if you're unsure of what to do.
Think about saving the planet with ESG
There’s been a growing trend in recent years to ESG investing – where you put your money into companies based on their Environmental, Social and corporate Governance criteria. Think renewable energy investments instead of putting your money with oil producers, for example. People are securing financial freedom based on this planet-saving way of investing.
By instructing your money to be placed into funds focused on ESG factors, you’re potentially helping the environment and local communities at the same time as aiming to help your capital grow.