This week, our blog focuses on all things related to personal finance and financial confidence. We are always told that keeping track of our finances is important, but it can be a daunting task to get on top of! Thankfully, there are a number of tools out there to make the process a lot easier – gone are the days of tracking everything in a big ledger or hiring an expensive accountant for a comprehensive view of your finances.
What is Financial Confidence?
According to Financial Capability, a UK think tank, there is no standardised or agreed definition of financial confidence, however there are a number of common traits which people express as a measure when polled in surveys conducted across the world.
- Self-Efficacy: the extent to which people feel empowered and confident making important decisions with their money
- Self -Assurance: how far people have the self-belief to enact these financial decisions
- Self-Determination: whether people have the diligence and self-control to support their financial goals
These topics are explored in more detail in the excellent ‘Measures of Financial Confidence’ report published by Financial Capability, which can be found here.
The Current Landscape
The backdrop of the pandemic and resulting economic turbulence has motivated a renewed interest in personal financial matters. As many as 36% of UK adults surveyed said they were either very or fairly concerned by their personal finances over the next 12 months (Jun 2020). Lockdown measures and redundancies have place unique financial stresses on a significant proportion of the population. This growing consciousness has been reflected with concrete action at the consumer level; in June of this year, it was reported that UK consumers had paid off a record £7.4bn of credit card debt during the lockdown. This is around 14x as much as would normally be expected for the period, reflecting a growing consciousness of the need for belt-tightening in the face of local and national economic uncertainty.
Building Financial Confidence
With this in mind, many of you might be asking where to start in order to build your financial confidence and gain a better view of your personal finances. Here, we outline a multistep process which you could follow or adapt to suit you best:
- Get a Bird’s Eye View
Have a look at your bank statements and bills to get a good idea of what is going in and leaving your accounts. If you use app-based banking, this couldn’t be easier, with many employing accessible tools to break down your expenditure by sector (i.e. rent, groceries etc.). Try to then put this data into a tool which allows you to keep track on a monthly basis – this could be an excel spreadsheet, a budgeting app or a simple notebook.
- Clearly Define your Financial Goals
Try to ask yourself what you want out of life, and how you can get there quicker. It may be becoming a homeowner, saving for your child’s university education or simply building a ‘rainy day’ fund. Try to estimate how much is needed to achieve these goals and what options there are to help you achieve, or surpass the required amount. Try to think as long term as possible when doing this, as it will certainly help with the next step!
- Do a Spring Clean of your Outgoings
The widespread use of automatic billing services such as direct debit may make it easy to lose track of some of the things you are paying for, which may risk wasting your hard-earned cash. Subscriptions to digital services such as Netflix or Amazon prime are easily forgotten about, especially if they aren’t used very often. As with your mobile phone bill, it may be that there are cheaper plans which may suit your usage better if you don’t want to get rid of your subscriptions altogether. You can also look at your debt obligations and see if there is an opportunity to refinance your loans, or pay off anything early so you end up paying less overall, which has the great power to transform your financial outlook.
- Set a Separate Budget for the ‘Wants’ vs. the ‘Needs’
While there are some expenses that are stable and predictable (e.g. monthly rent, mortgage payments) which we would deem the ‘needs’, there has to be room for ‘wants’ in life too. Once you have an appreciation of the former, you are more effectively able to set a budget for things such as entertainment and shopping. We’ve all been in the situation where we’ve overspent slightly, however having this clearly defined budget gives you the confidence to have fun in conjunction, rather than in contention with your personal financial goals.
- Look at Building a ‘Nest Egg’
After all your expenses are taken care of, look at how much you can save for later on. Building your savings can only benefit you in the long run, whether for use in an emergency or in retirement. This is where the true power of investment can come in, through what’s known as compounding. For example, say you invest £10,000 in an stock that grows 10% per year, you will see an amount returned to you of around £110,000 after 25 years (assuming stable growth), and this is without investing anything extra! This growth comes not only from the individual capital you invested, but is also applied to the 10% return you see each year, leading to an exponential increase in the value of your investment. Note that it is always better to diversify your investments in order to mitigate risk, rather than putting all of your investable funds into one investment.
This powerful compounding effect is especially relevant when it comes to pensions. Areeb Siddiqui, CEO of ethical banking and personal finance app Kestrl, suggests that as a rule of thumb, it is sensible to pay half your age as a percentage of your salary into a pension (i.e. at 30, ideally you would be paying 15% of it into your pension). With this in mind, the earlier you start, the more time you have to compound any returns you gain, regardless of when you decide to liquidate your investment.
- Don’t Be Afraid to Ask for Help!
Modern financial matters can be complicated, however, thankfully there are a number of free resources which can help you navigate your journey towards achieving your goals. Websites such as the Money Advice Service and MoneySavingExpert offer impartial advice on a range of topics to do with personal finance. Moreover, your high street bank will likely have a resource to guide you through any concerns you might have.
So How Does Yielders Fit In?
Here at Yielders, we offer Real Estate backed investments starting at £100, which could be the perfect place for you to start on your investing journey, if and when you’re ready. With dividends paid out monthly to your unique user e-wallet, we make it easy to track the gains from your investment regularly. If you have any questions about how our investments work, have a look at our help centre or email the team at firstname.lastname@example.org and we can answer any questions you might have.
* Please note that the information in this article serves only as a guide and should not be taken as financial advice. As with all investments, your capital is at risk when investing with Yielders.