How to manage personal finances isn’t something that’s taught, yet it’s instrumental in ensuring you live within your means and build enough wealth over time to support yourself and any dependents once you stop working. And it’s challenging to strike the right balance between settling everyday expenses and saving for the future and to master the different ways to protect and grow your wealth. This guide covers the basics of personal financial planning, so you can approach yours with confidence.
1. Setting clear goals
You cannot build a clear financial plan until you know what you want to achieve. Vague aspirations, such as ‘having a decent pension pot’, aren’t sufficient. You need to establish clear goals for the short-term, medium-term and long-term. Each should be SMART – specific, measurable, achievable, relevant and time-bound. For example, you could aim to clear bad debt within the next year or save a specific amount into an emergency fund within a set timeframe.
Each target gives your spending decisions more meaning. For example, skipping a few takeaway coffees each week feels more worthwhile, because you know that these actions are moving you closer towards filling your holiday fund. Write down your financial goals and keep these in mind, regularly reviewing them and marking progress.
2. Creating your budget
A budget is the foundation of successful financial planning throughout your life. It balances your income against your outgoings, revealing areas where you could save and helping to ensure you spend within your means and stay on track with your long-term goals. It’s important that it presents the real picture rather than an ideal version of your finances, otherwise it won’t be a useful tool.
Begin by reviewing your earnings alongside regular essential expenses such as housing, transport, food and subscriptions. Then see what you can devote to non-essential spending and savings or paying off debt. The best budgeting method for most is the 50/30/20 rule – 50% for essential needs,30% for wants and 20% for savings or debt repayment.
3. Organising your savings
Savings shouldn’t sit in one pot, because you’ll be saving for different reasons. You need to build an emergency fund for unpredictable expenses, like the car breaking down, a pot for your wants like holidays and nest eggs for the future, for yourself and possibly family members. Separating your savings into different categories can also make your finances easier to manage. When your earnings are stretched, you can forgo the non-essential savings channel for a month, while knowing that emergencies and long-term pots are protected.
Automatic transfers help remove temptation because the money moves before you have the chance to spend it elsewhere. Arrange your automatic transfers on payday so saving happens consistently throughout the year.
4. Exploring growth strategies
Once you have built a financial safety net, you can explore ways to make your money work harder – and therefore go further. You may want to explore the option of investing as a way to try and beat inflation and find better interest rates than standard savings accounts. You can approach this with the support of an expert investment management team or build and manage a portfolio directly through a reputable online platform.
Taking time to understand the crucial elements of investing such as risk and diversification helps you make informed decisions instead of reacting to short-term market movements. It’s important to understand the options and the amount of uncertainty you feel comfortable accepting. Fixed-rate savings accounts often offer decent interest rates in exchange for you leaving the money untouched, and don’t carry the risk. Stocks & Shares Individual Savings Accounts (ISAs) are a strategic middle-ground growth method that let you save thousands tax-free. Review your investment choices every year to check that they still match your objectives and changing circumstances.
5. Staying consistent and flexible
Life rarely follows a perfectly predictable path. Anything from a promotion to changing family circumstances to sudden expenses can derail your budget and impact your financial priorities. Staying adaptable and adjusting your management and goals where necessary helps you stay on track in the long run.
Consistency is also vital. Regulating spending helps to prevent lifestyle creep, while saving little and often is the sustainable way to protect your financial future and helps you learn good habits that can be transferred across all areas of financial management.
