There are plenty of things that we are expected to understand as we move into adult life that they don’t teach us in school. Money is definitely one of them. Jargon and job titles lead to the assumption that personal finance is an incredibly complex subject. Some people are lucky enough to learn along the way, while others break through the fear of complexity and spend a lot of time teaching themselves about money. You are about to be one of the former... Doug Clarisse* is here to break it down to the basics and make it simple for you to dive right into building your money confidence in five simple steps.
Here are Doug’s simple steps to managing your money and personal finances:
Step 1: Prepare a Budget
Knowledge is power, and understanding your true spending, v’s what you think you spend, is a great place to start. This can feel like an intimidating step and it is important that you do not berate yourself when you look at how much money you spend and on what. This is the start of your new relationship with money, one where you feel in control and empowered to create good habits.
Start by taking out the last few months of your credit card and banking statements to get an accurate assessment of what you really spend. Put your expenses into different buckets such as:
Subscriptions (e.g. streaming services, magazines, gym, etc) and entertainment
Other and Contingency
Examine, in particular, your subscription and entertainment budget, and ask yourself, do you really use that online subscription? Culling a few of these can be a really easy win and save you hundreds or even thousands of pounds a year.
When you know what you spend, try to create a realistic budget moving forward. It can be tempting to strive to massively reduce your spending all at once, but we are in this for the long-haul and we want to make small, gradual improvements over time.
Step 2: Start to Save
After you have reviewed your cash outgoings (and if necessary reduced them so that they are less than your monthly paycheck) see how much you can save, and try to stick with it.
Do you have debts? If you have an outstanding credit card or other forms of personal debt, try to reduce that first - reducing debt is one of the best forms of savings! Choose an amount that you are pretty sure you can hit every month, for instance, £100, so that you can reliably predict your progress towards eliminating the debt. Personal debt is generally very expensive, and your savings will multiply by reducing the heavy interest charges.
After you’ve freed yourself from personal debt, create a rainy day fund, in case something happens for which you haven’t budgeted, for example, your car needs significant repairs. Some people recommend having 3 months of salary saved in case something unexpected happens - for example, you may decide to start up your own business.
Another good way to save is through a pension. If your place of work offers a pension, make sure you are taking advantage of it. This is free money from your employer, and the government will also chip in with tax benefits.
Step 3: Invest for your Future
Once you have got these basics down, you are in a better position than many people - enjoy that feeling!
Now it is time to start putting money aside as an investment for the future. This could be towards a deposit on a home if you don’t already own one, or into a portfolio of securities.
So many people assume that only the pros understand investments. This is a massive misconception. Anyone can learn. Blank out those images of traders on the floor shouting and signalling each other. Trading is different. Investing is about the long game, it can be as high or as low risk as you like, and whilst investments will have highs and lows, we are looking for that slow and steady incline.
There are many ways to construct a securities portfolio, and this will depend on your attitude towards risk and your stage of life. If you are young and single, or nearly retired with two children to put through university, you will want to approach this phase very differently.
If you are fortunate enough to have a significant amount of money saved to invest, find a reputable Independent Financial Adviser, also known as an IFA. Be picky, interview several to hear different strategies and ideas, make sure that you get on, and that your values are aligned. An IFA will help you to design a portfolio that matches your needs.
Tip: Make sure to ask your IFA about savings plans such as ISAs or SIPPs - the former is a savings plan, and the latter is a way to increase your pension savings - both are tax-advantaged, so worth considering.
If the amount you have to invest is modest, do not let this stop you. There are online investment management companies that use algorithms to help you make appropriate choices. These are also known as ‘robo-investors’. You are able to choose the risk that you are comfortable with and start investing with a small amount of money.
Remember: It is important that you have savings first, as investments are inherently risky and your capital is at risk. Never invest an amount of money that you will lose sleep over if the investment takes a dip. Ease yourself in as you learn about the platforms you use to build your confidence and understanding.
Step 4: Maintain Good Financial Hygiene
I know it sounds boring, but this step will be an extremely important part of building your control and confidence when it comes to personal finance. Review your credit card and banking statements every month - the earlier you detect any malfeasance, the easier it will be to get it rectified.
Tip: Please use difficult to guess passwords, take it from me, fraud is a growing problem.
Occasionally check-in on your monthly budget as well - if your expenses have changed, adjust your budget. There is no point in having an inaccurate budget.
Keeping good records (bank/credit card statements; utility bills; mortgage statements; repair bills, etc) will help with year-end tax returns, applying for a mortgage or getting started with those investments we have been talking about. Banks and IFAs will ask you a lot of questions to help determine the best products to suit your needs, and if you have everything ready to hand, the process will be a lot smoother.
Finally, make a will. While it can be a bit of a morbid process, there is a lot of satisfaction once it’s done. Doing this can ensure your final wishes are respected and avoid both additional heartache and a lot of admin for your loved ones. You can easily update this in the future if needed.
Step 5: Remove the Awkwardness from Money Conversations
There is a time and a place to talk about money. I am not advising crass conversation or boasting, but equally, talking about budgets, spending, saving and finance with trusted friends and loved ones should not be seen as a faux pas. You never know what advice you might pick up, or what tips you may learn. If you do find yourself in a difficult situation, be open with your partner - keeping financial secrets can bring a huge amount of stress to relationships, and two people may be better at solving a problem than one.
About Doug Clarisse
*Doug is not a regulated financial advisor, but as you can see from his bio below, his extensive experience gives him a grounded perspective to follow.
Doug has more than 20 years of investment banking experience both on Wall Street, New York and in the City, London. His practice focused on advising growth-oriented small and medium-sized corporations, especially with respect to funding acquisitions and/or restructuring their balance sheets. Since leaving the City in 2015, he has become an active angel investor and offers advice to startup companies. Connect with Doug here.