May day, may day - A bank holiday to rescue your finances
Spring is upon us and there are more and more reasons to be cheerful. Although, the headlines may suggest otherwise.
Important notes: Remember, this article has been created to draw your attention to some important financial decisions. But it’s not personal advice. The decisions and actions you take must be based on your own personal circumstances and goals. If you’re at all unsure of what to do, please seek financial advice.
May day!
If the cost of living crisis has caused you to focus on your short term finances, this may have been detrimental to both your mental health and your longer term plans. Really, you should think of all the things you’ve got to look forward to and plan your finances around those. It’s a sure-fire way to make the gloom feel less gloomy and feel better that there are brighter days ahead.
Debt
Ok, talking about debt isn’t exactly a skip through the spring blossom. But much like shifting pounds in the gym makes us feel good, so does shifting pounds off our debt. Ask any financial adviser what you should do first and they’ll likely tell you to clear some of your debt.
So make this bank holiday the day you make a plan to clear your debt
Our research shows that only 29% are resilient when it comes to the affordability of their debt in the future. And even of those in the highest bracket (over £150,000 p.a.), almost 25% were assessed as having a poor or very poor debt situation by our study.
Also keep an eye on any interest free debt or debt with a promotional rate of interest. The expiry date on these rates have a habit of creeping up on us.
Action: When money is tight, clearing debt can seem insurmountable. A good starting point is to look at the information and services available from Citizens Advice.
It may not be exciting but using a good amount of your surplus income to pay off debt will help you feel a few steps closer to great financial freedom. Here are a few ways to help clear your debt:
- Prioritise paying off your high interest debt such as credit cards and short-term loans
- Set up direct debits to help you stay on top of payments and avoid late fees
- Review your expenses to see if you can afford to pay more off each month
- Check when interest free or promotional rates end
Being smart with surplus income
32% are left with money left over after their essential expenditure each month.
The proportion of those with surplus income mirrors the common curve of accumulation and decumulation of wealth over a person’s life. With the youngest the least likely to have surplus income and those in their 40s and 50s most likely.
What the link with the wealth curve shows is the importance of what you do leading up to your peak earning power. Saving as much of your surplus as possible before the decumulation phase is crucial.
Remember, the biggest reason to save and invest is to give yourself options. So, be smart with your surplus. You’ll make your future brighter and when it comes, you’ll thank yourself.
Action: Start looking at budgeting in a different way. Look to ‘reinvest’ some of your surplus income by saving it.
The one golden rule to remember is that you need some savings which are easy to access in case of emergencies and some for longer term and, let's face it, more fun goals.
How to put your surplus to work:
- Pay more into a workplace pension - remember, your employer will often match your contributions so this could mean a good boost to your pension over time. You can usually access money in a pension from 55 (rising to 57 from 2028).
- Pay into a Lifetime ISA (LISA) - you can open a LISA if you’re between 18 and 39 and pay in up to £4,000 per tax year until age 50. You’ll receive a 25% government bonus on anything you pay in, although money in a LISA can only be used without penalty for an eligible first home purchase or after age 60. If you choose to invest the money in your LISA you may also see investment growth over time.
- Pay off a bigger chunk of your debt - particularly any high interest debt such as credit cards. If you can pay it off in bigger chunks, you’ll save money in interest
- Pay into a mix of cash savings accounts - there are some high savings rates at the moment. Paying into easy access and fixed term accounts will help you build a cash buffer for emergencies and reduce the impact of inflation on your cash. Just remember with fixed term accounts, you usually can’t access your money until the end of the term.
It would be unrealistic of us to suggest not spending any of your surplus cash on a luxury. Whether that’s something small like a nice coffee or something bigger like a holiday, we all need some retail therapy occasionally.
Easy access cash
If clearing debt is the number one recommendation from advisers, a solid cash holding is a close second. As a general rule, we suggest 3-6 month’s worth of essential expenditure in easy access cash if you’re working. We suggest 1-3 years if you’re retired.
By easy access, we mean cash you could withdraw or use today without incurring any fees or penalties.
The good news is that just over 50% of those featured in our study had a good or great level of cash savings.
But this figure is propped up by the top 40% high earners. For low income and the so-called ‘squeezed middle’ adequate cash savings are far less common.
The good news is that just over 50% of those featured in our study had a good or great level of cash savings.
But this figure is propped up by the top 40% high earners. For low income and the so-called ‘squeezed middle’ adequate cash savings are far less common.
Action: If you’ve been budgeting month to month, your hard work can be used to secure your longer-term financial future too.
Revisit your essential expenditure for each month (things like bills, rent, essential travel costs) then check your savings to see how many months you could cover. Ideally, you should also have enough of a buffer to cover unexpected costs such as a major car repair.
Once you know how much you need, you can look back at your surplus income and your debt and see how much is left to save as cash.
Try Active Savings and view a range of easy access savings accounts available from our banking partners.
Balance between cash and investments
Cash is an important part of your financial confidence but your investments also play a big part in saving for something to look forward to.
Although the value of cash is affected by inflation, the value of investments fluctuates all the time. You could get back less than you put in and that’s where an understanding of investment risk comes in.
The balance of cash and investments you hold will depend on how much risk you can afford to take.
Ultimately time is the crucial factor for determining risk. It’s near impossible to get in and out of the stock market at a good or bad time. Instead, you should focus on being in the market for the long term in order to hopefully ride out the peaks and troughs of the markets and take advantage of compounding.
If you’re already an active investor, when was the last time you looked at how much investment risk you’re taking and whether that’s suitable for your goals?
Action: Hopefully you will know by now how much you’ve got in cash and whether this is enough to make you as resilient as possible. Now it’s time to look at how much you’ve got invested, your goals and how much risk you can afford to take.
Revisit your essential expenditure for each month (things like bills, rent, essential travel costs) then check your savings to see how many months you could cover. Ideally, you should also have enough of a buffer to cover unexpected costs such as a major car repair.
Once you know how much you need, you can look back at your surplus income and your debt and see how much is left to save as cash.
This can be a little hard to find out yourself and sometimes even harder to know what to do next. Decisions about investment risk can make or break long term plans like retirement. Some of these decisions are irreversible so in some cases, the best action you can take is to ask an expert adviser.
Your pension and your retirement
Whether it’s in three months or 30 years, your retirement should be something to look forward to.
But your retirement also means making some tough decisions. Some of which could affect how comfortable your retirement is. The Pensions and Lifetime Savings Association (PLSA) have published figures which suggest a couple (outside of London) would need £54,500 of income per year to live a ‘comfortable’ retirement. That means being able to afford things like running 2 cars and taking holidays abroad.
Our research shows that only 15% are on track to being able to afford this level of comfort in retirement.
Action: The most crucial time to take action is when you’re nearing retirement. It’s at this point where you’ll need to really start thinking about where your income will come from, how much you’ll get and what you’ll need it for.
But you shouldn’t wait for the crunch. Our study shows that even of those in their 40s and 50s when earning power tends to peak, less than a fifth are on track.
Use our pension calculator to get an idea if you’re on track.
Getting retirement advice from a qualified adviser may also help you make important decisions and help you feel comfortable you’ve made the right choices to help you achieve the lifestyle you want.
Protection
Insurance is something you pay for but hope you’ll never need. There’s no other type of insurance that’s more applicable to than life insurance.
It’s another topic which feels like it might dampen your bank holiday. But it’s important because it affects those you love the most. Spring as a season is associated with new life and growth. And life insurance pays out to ensure newer lives have the support they need to continue growing.
Yet, it’s something which seems to be forgotten about. Our research shows only 26% of couples with children have adequate cover. Similarly, single parents are least likely to have income protection in place.
Action: Some employers offer life insurance as part of your benefits. But it may be a default scheme which doesn’t adequately cover what your family would need should the worst happen.
So, how much is enough? Life insurance generally pays out in multiples of your salary. A good place to start benchmarking is the value of your mortgage. Afterall, paying off a mortgage is likely to play a big part in helping your dependants stay financially stable. If there’s an option to top it up and you can afford to do so, it’s worth it for the peace of mind.
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All statistics in this article have been provided by an Oxford Economics study commissioned by HL. All figures are correct as of January 2023.