Needless to say, 2020 was a challenging time for many of us, and we’re hoping for smoother sailing in the new year. But regardless of what 2021 has in store for us, it could be wise to financially prepare for the year ahead (and any potential unexpected events). Here’s a few tips to help you take control of your finances, from saving to investing, so you’re in a solid place to face any challenging situations.
Review your finances
The first thing you could do this year is review your finances. 2020 hit a lot of us very hard and many have seen their financial situation change due to the pandemic. So, with the new year starting, it’s worth checking where you stand financially, and that way you can realign your goals and start planning for the near and longer-term future.
If you had to use your emergency savings, then you’ll know how important it is to have a safety net and you may want to keep planning for the unexpected. However, if you’ve spent much of the year working from home, chances are you may have managed to save a bit more than usual, which hopefully means more money to either pay off your debts, tuck away for a rainy day, or invest for the future.
Set financial goals
If you want to take control of your finances, it’s important to set the right goals. Make sure they are SMART: specific, measurable, achievable, realistic, and time bound. Instead of saying ‘I want to save more’, try ‘I’ll put £30 in a savings account at the start of every month for a minimum of five years’ – obviously the sum and number of years can change depending on your financial situation and personal circumstances. The key is to set financial goals that are right for you, so that you can plan efficiently and track your progress.
Get your finances in shape
2021 could be the year you claim back power over your finances. One thing you could do is review your monthly outgoings, including your spending habits. Is there anything you could cut down on? Do you tend to spend a bit too much on non-essentials? How often do you buy on impulse? Spotting your unhealthy habits is the first step in taking control of your finances.
Once you know where the issue is, you can fix it and start creating a budget to get your finances in shape. A good budget tells you where your money goes, and it allows you to keep control. As a rule of thumb, it’s a good idea to list all your expenses and with what’s left, decide how much you will put aside and how much you’ll keep for your present self.
Make saving a priority
Let’s be honest, it’s not always easy to put money aside, especially if you have debt to pay off or little money left after you paid your bills. But saving is important as it allows you to plan for potential emergencies and build plans for the future. Now, you don’t need to save large lump sums if you can’t afford to, but you can still build up a decent nest egg for the future by saving little and often. After all, £50 saved every month is £1,200 saved over two years, and £3,000 put aside after five years.
Think about investing
When it comes to taking control of your finances, saving is crucial. However, over the long-term, saving may not be enough and you may be missing out on potential opportunity. To enjoy real growth, your money should grow at least at the same pace as everything else. But with low interest rates, your savings may struggle to keep up with the rate of inflation and over time, the value of your money may decrease, meaning it won’t stretch as far when you finally come to spend it.
If you’re looking for inflation-beating returns, investing could help. Obviously, putting money in the stock market can be a bit scary, especially if you’re new to it. It is true that returns aren’t guaranteed and there’s a risk you could end up with less than you initially put in. However, as returns aren’t tied to any fixed interest rates, this also means you could end up with higher returns over the long-term than if you kept your money in a traditional saving account. For instance, since 1983, the FTSE 100, which is the main stock market in the UK, has returned about 6.2%1 a year (with re-invested dividends). This sits well above 4.1%2, which is the average inflation rate (RPI) between 1980 and November 2020, and far above the current Bank of England interest rate of just 0.1%. One thing to note though is that past performance, although very insightful, is not a reliable indicator of future results.
If you want to give investing a try, it’s simple to get started with a ‘robo-investing’ platform such as Wealthify. You can open a General Investment Account or a Stocks and Shares ISA with just £1 via their app or desktop, and their team of experts will do the hard work for you, from picking your investments based on your risk appetite to managing your Plan on an ongoing basis. The other great thing about Wealthify is that you’re in control, as you can check how your Plan is doing or top up at any time and from anywhere. Wealthify were named ‘Best Investment Provider’ at the British Bank Awards 2020, and really can help make investing effortless and accessible to anyone.
1: Data from Bloomberg
Past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.