Managing your personal finances can be tricky. HMRC rules and regulations, tax thresholds, and tapered allowances are complicated and that’s the reason we’re here.
Advice is important at all stages of life but receiving professional help when you’re just starting out – beginning your career or moving away from home – can lead to the biggest impact in the long term.
Money is important to our standard of living and our general wellbeing and there are simple lessons we can pass on that could make all the difference.
Here are five financial basics to pass on to the young adult in your life, to help ensure their financial wellbeing.
1. Budgeting
Understanding inflows and outflows is the most important thing your child or grandchild can do to get a grip on their finances. Monitoring daily, weekly, and monthly outgoings makes calculating disposable income easier and can highlight areas where savings can be made.
Encouraging a loved one to keep track of bills and to shop around when tariffs for utilities creep up can make a real difference to their finances. So can simple things like making a shopping list and sticking to it in order to avoid unnecessary expenditure.
Budgeting apps might help, as can managing income effectively. One method, the 50/20/30 budget rule involves using 50% of your income for bills and fixed expenses, 30% on discretionary expenditure, and 20% on savings and planning the future.
The effectiveness of this method will be determined partly by income, and also the level of debt a young adult might already have.
2. Clearing high-interest debt
Financial wellbeing means peace of mind and security. It also means giving yourself as many financial options as possible. Having high-interest debt can make these things difficult.
Saving effectively while debt exists, especially high-interest debt, isn’t easy. If your child or grandchild has existing high-interest debt, such as credit cards or loans, encourage them to prioritise repaying these.
With the Bank of England base rate low, interest on savings will be low, whereas the cost of the debt will be comparatively high. Lowering high-interest debt will give your child many more financial options in the future.
This might include beginning to think about the long term, for example.
A reduction in debt can help mental and physical wellbeing. The rising level of finance-related anxiety experienced during lockdown has been well-documented.
3. The importance of an emergency fund
The ability to cope financially with a sudden and unexpected expense is massively important. Encourage your child to put an emergency fund in place to improve financial wellbeing – and to ensure peace of mind – for both you and your child.
Ideally, an emergency fund should be three to six months’ expenses, held in an account that allows quick and easy withdrawals. No matter what the sudden expense is, a financial safety net will make navigating a difficult period easier.
It might seem like a large amount to put aside at first, but by concentrating on budgeting – calculating disposable income and putting a small amount aside each month – it’s possible to grow a sizeable ‘rainy day’ fund.
4. Have a clear plan for the long term
If your loved one is heading to university, starting a new career, or moving into their first home, short-term worries will probably be the ones dominating their thoughts. But it’s never too early to think about the long term.
Getting on top of debt, having a clear grasp on incomings and outgoings, and having the safety net of a rainy-day fund means that you can begin to look further into the future. Encouraging a loved one to start saving for retirement early can have a massive impact when their retirement date arrives. Building up an investment portfolio could also lead to significant long-term gains.
Understanding the basics of finance – lessons rarely taught in schools – can help to improve your child’s financial wellbeing and their understanding of their financial position. Being in a good financial position early means opening up more options for the future and a greater chance of seeing the compounding effect of long-term investment.
5. The benefits of advice
To plan effectively for the future, your child or grandchild will need to understand the basics of finance and then think about their long-term life goals.
We understand that building a career, getting onto the property ladder, and merging finances with a partner, can all be tricky.
Having a grasp on their current finances, their aspirations for the future, and long-term goals, will put a young adult in the best position to achieve those goals.
Get in touch
Financial wellbeing is about more than just a bank balance. It’s about a loved one having a grasp of their finances so that they can build the best opportunities for themselves over the long term and have the best chance of achieving their long-term financial goals.
If you’d like to discuss any aspect of your or a loved one’s financial wellbeing, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.
