Money. It's one of the most powerful and divisive topics known to humankind, and whether you believe it makes the world go around or is the root of all evil, the availability of money will dictate most aspects of your life in some way.
Given the importance, it seems weird that we receive no standard education on how to manage money 🤔. Fear not though! We've put together this light-n-breezy guide to mastering money... and there's not a blackboard in sight 👨🏫.
1. Find out how much you're earning and spending
The first and most important step in your financial revolution ✊ is to fully understand your present situation. As a minimum, we suggest reviewing your income and outgoings for a typical month to see whether you end up with more or less than zero by the end. If it's below zero, don't be despondent—when it comes to money, knowledge is power 🤓.
Perhaps this may sound like an obvious step, but human nature can be a tricky thing... and when faced with bad news many of us may instead prefer deliberate ignorance. So, whilst this may not be the most appealing task, it's an essential part of your journey towards a new improved you—just don't go changing too much now!
2. Manage and pay off your debt first
Few things are quite as crushing as the feeling of unmanageable debt. As a nation, we're carrying more debt than ever before, yet for those who have never been in this position it's almost impossible to understand the massive effect this can have on a person. It can even have a detrimental impact on your health. All the more reason why it's time to start taking back control!
One of the biggest problems associated with being in debt is that, despite your best attempts, the interest payments can all but nullify the efforts you make to pay off a loan balance. A good first step is to consolidate your debts and see if a more manageable rate of interest can be negotiated while you pay off your creditors. Failing this though, it's at least sensible to prioritise loans with the highest interest rate—referred to as the 'Annual Percentage Rate', or APR 📈.
3. Set yourself a budget and reduce expenses
OK, so far things have been pretty retrospective, but it's now time for the fun bit—your new budget! With the understanding of your income/expenditure (see step.1) you can now implement the 'secret' financial practice that every millionaire knows well... living within your means. So, if you typically spend more than you earn then now's the time to consider trimming some of your outgoings.
A useful rule-of-thumb when setting a budget and establishing a meaningful plan for the future is the 50/30/20 rule 📊. This states that you should aim to use 50% of your (post tax) earnings for 'essentials' (e.g. rent, utilities and food), another 20% for your 'savings' (or paying off debts first), and the remaining 30% for your 'wants'—the stuff that makes you... you! If that all sounds a bit too advanced for this stage, then a good start is to set aside 15% of post-tax earnings for your retirement 👵.
4. Get some breathing space with an emergency fund
Once any outstanding debt has been cleared and you have a meaningful financial plan in place, our next recommendation is to begin building a safety-net which can be used in the case of an unforeseen disaster—an 'Emergency Fund' 🏥. Whilst there are no hard rules on how much money your emergency fund should contain, most financial gurus suggest saving 3-months worth of living costs as a minimum (so you can still cover your rent and food etc. in the event that you e.g. lose your job).
An Emergency Fund can be a life-saver if the worst should happen, but this isn't just some nice-to-have, blue-sky objective. Once you have a buffer like this in place, it means you can break the cycle of living paycheck-to-paycheck... then start to think really big! How much would you need to re-train for your dream job? Or finally move to the Bahamas?? OK, so maybe not the Bahamas (you can't use Plum there), but you get the idea! And step 5 can help you grow your money to achieve it...
5. Make your money work harder... so you don't need to
Current UK interest rates mean that unless you're willing to lock your money away for a long-time, the chances are that your savings will not be earning enough to nullify the effect of inflation. Let's just pause for a moment to let that sink in!
The effect of inflation means that every day your money sits in a standard (low interest) savings account, it is worth less in terms of actual spending power—i.e. what you can buy with it. The solution is to grow your money faster than inflation, with a common option being to invest in stocks or bonds. Whilst this does carry an element of risk, because the value of these can go down as well as up, and whilst past performance is not a reliable indicator of future results, it's worth remembering that historically the value of the stock market has increased on average over the long run... for those patient enough to ride-out any downturns 🎢.
How Plum can help you be better with money
Almost every internet 'life-hack' or financial advice site will recommend that you automate your savings, and this also happens to be the fundamental principle on which Plum was founded 🤖. So, whether you're looking for a helping-hand to automatically set money aside without adjusting your spending, or simply looking for a more convenient way to manage your savings pot—Plum can offer a solution that works for you, and fits in with your lifestyle! 🏃♀️
Budgeting is a crucial part of any financial plan, and while everyone will have their own specific challenges when it comes to achieving their personal goals, for most of us utility bills will constitute a significant portion of our monthly spending 🧀. Despite the current topical nature of this subject and the fact that we are being urged to regularly evaluate our present suppliers, many of us are still being ripped off due to a flawed system which energy suppliers happily exploit. By analysing your regular spending, Plum can automatically search for the best provider in your local area and arrange for your service to be switched automatically. Easy Peasy.
If a proactive approach to saving is the first step in your financial plan, then a long-term strategy to grow your money should be the eventual goal 🌱. The aim is to generate a rate of return on your savings that is greater than that of inflation—otherwise you'd be able to buy less with your money in real terms.
Investing in stocks and bonds represents a risk compared to a savings account, for example (where the best returns are reserved for those willing to forgo quick access to their money). But Plum can help by presenting simple options that remove the need for any previous knowledge of investing. 📉 We offer features that allow you to split (or diversify, as they say in the business) your investment pot according to the level of risk that's right for you. There's a reason why +70%* of people who trust us with their investments have never owned stocks or bonds before!
*Based on survey of 59 Plum users conducted in July 2019
The road to financial independence can seem like a daunting one—particularly if you're struggling with debt. But no matter how bleak your present situation feels, it's important to stay focussed on your reasons for wanting to make this change. And remember, the first step on any journey is always the hardest...
You may find that it helps your motivation to work towards specific goals which you can celebrate—you can also use progress milestones on the way for long-term objectives. And don't ever be shy about lavishing a little congratulation on yourself for taking the time and effort to master your finances!
If you feel you're ready to implement any of the advice given in this article, then Plum can help you every step of the way. It's completely free to save, and you can sign-up in minutes using our iOS app or Messenger.Finally, if you feel that money matters are having an adverse effect on your health or wellbeing, then don't hesitate to reach out to specialists who can help.