88% of the UK lack confidence when it comes to personal finance and investing.
It doesn’t need to be this way.
Personal finance is a set of skills that can empower you to become comfortable and confident with money.
Here are some of those skills, in today’s Personal Finance Friday.
When that satisfying moment arrives – the notification that your monthly money has been deposited in your account – it’s essential to have a system in place to make the most of your earnings.
Understandably, a lot of people get excited when money lands in their account and the knee-jerk, instinctive reaction will be to spend it.
But this is a guaranteed way of falling into bad financial habits and setting yourself up for a life of discomfort and insecurity.
Following a structured approach to your monthly income ensures your financial stability and sets you up for long-term growth.
It also allows you to achieve your financial goals of buying a home or retiring early.
But crucially, it improves your financial literacy skills and allows you to become comfortable and confident with investing, spending and income.
So, here’s your go-to guide to effectively manage your monthly income:
1. Calculate Essentials
- Action: First and foremost, make a note of all your essential expenses. This includes rent or mortgage, utilities, groceries, transportation, insurance, and any debt repayments. Get the figure, write it down, and subtract it from your paycheck.
- Explanation: By identifying and allocating funds for essential expenses immediately, you ensure that you cover your fundamental needs without stress. This clarity keeps financial anxiety at bay and lets you focus on your financial goals.
2. Budget for Non-Essentials
- Action: Once essentials are covered, allocate a portion of your paycheck for non-essentials. This could be for entertainment, dining out, hobbies, or shopping. Again, get the figure, write it down and subtract it from your paycheck.
- Explanation: Setting a budget for non-essentials allows you to enjoy your earnings without overspending. It’s a way to strike a balance between living in the present and planning for the future. You can’t stop living life!
3. Automate Deposits into Investment Account
- Action: Determine the amount you can invest after essentials and non-essentials. Then, set up an automatic transfer from your primary account to your investment account each month. So, no matter what, every month this money comes out. Short on money? Cut back on non-essentials. This figure never goes down from here. It only goes up as you earn more. For a detailed guide on what sort of investing I’m talking about and how to get started, read this post.
- Explanation: Don’t be put off if this is a small amount. Even £100 a month is better than nothing. Automation eliminates the temptation to spend and ensures that you consistently channel funds into building your wealth. And as you increase your income, keep the ‘essential’ and ‘non-essential’ pots the same and increase this one. That’s the key to getting becoming comfortable with money when you’re older.
4. Set Up Recurring Investments
- Action: Within your investment account, establish monthly recurring investments in diversified assets. I recommend using InvestEngine. It’s really simple and easy to use.
- Explanation: Consistent monthly investments leverage the power of dollar-cost averaging, reducing the impact of market volatility and ensuring you’re investing irrespective of market highs or lows. We’re looking for ETFs, bonds and tracker funds here (S&P500, FTSE100, World Tracker, Government Bonds). For tips on example investment portfolios, see here.
5. Appreciate the Long Game
- Action: Adopt a long-term perspective. Aim for a 10 to 20-year horizon. But appreciate that you might be working to a shorter horizon for certain goals (like buying a house). Again, see here for how to invest your money based on different timelines.
- Deep Dive: The beauty of investments is in their compounding effect. Over the years, as you keep investing, your portfolio grows with the stock market, begins to compound, and eventually, you will generate passive income. The longer your money remains invested, the more it can grow. So don’t get frustrated if you don’t get a return after 2 years. That’s normal. Give it 20.
6. Embrace Discipline, Patience, and Time
- Action: Stay disciplined with your investment routine, be patient with market fluctuations, and value time in the market over timing the market.
- Deep Dive: Investing isn’t a sprint; it’s a marathon. Short-term market dips are overshadowed by long-term gains. By staying disciplined and patient, and by giving your investments time to mature, you’re setting yourself up for sustained success. This is a key, key part of financial literacy and becoming confident and comfortable. You need to learn the soft skills of finance.
Conclusion:
Following this structured approach not only ensures financial stability but also builds a significant wealth portfolio over time.
The magic isn’t just in the money, but in the knowledge, discipline, and patience that make financial freedom attainable.
In conclusion, every time you receive monthly income you have an opportunity – a chance to secure your present and invest in a prosperous future. With discipline, patience, and a long-term vision, you’re not just spending money; you’re sowing the seeds for a brighter financial future.
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