With energy bills soaring and mortgage rates rising, building up your wealth may seem more than challenging. Taking ownership and managing your income and expenses is key to a successful future.
So, this week, wealth manager Richard Watson shares his tips for taking action now so that you benefit later.
1. Have a plan
You need a plan – a roadmap – to help you achieve your savings goals. And you need to stick to it. Tracking your income and your expenses by spending a little bit of time each month going through your bank statements, will ensure you know where you are.
Do you have any “stealth” direct debits – such as ones that have furtively kicked in after a free introductory offer (for streaming services or grocery deliveries, for example)? Check that everything else is in order and categorise your spending. That way, you’ll be able to get an idea of where your money is going and whether you’re spending money in areas you don’t realise.
2. Pay off your debts
If you have a lot of debt, knowing which to prioritise might not be that straightforward. Your approach will most likely depend on your circumstances and your long-term goals. Prioritising debt with the highest interest rates will help you save more money on interest. The highest-interest debt you will probably have is your credit card debt.
You can prioritise your high-interest accounts using the “debt avalanche method”. This involves making just the minimum payments on all your accounts, except the one with the highest interest rate. Put everything you can afford to into that account.
Once you've paid off the debt with the highest interest, take all of the money you were putting towards it and pile it to the one with the next-highest rate (alongside the minimum payments you're already making). Again, continue to pay just the minimum on your other accounts. Do this with each account until you have eliminated all your debt.
As part of our cash modelling exercise that we could undertake with you, we can help you review the terms of each one to see which have the highest rates.
3. Making full use of all your tax allowances is free money
Building up your wealth also means holding on to as much of what you earn as you can. First of all, set your sights on the low-hanging fruit and open up a cash ISA. You could also open a Stocks & Share ISA, giving you the potential to earn even more on your savings. Currently, the ISA limit is £20,000 for the current tax year. And crucially, you will not have to pay income or capital gains tax on any money you earn from your investment.
The next best place for money if you want to keep it away from HMRC is your pension. Most people can contribute up to £60,000 each tax year, and you can take advantage of unused pension allowances from up to three previous tax years. So in theory, you could contribute £60,000, plus three times £40,000 (the previous allowance) for the previous three years, making a total of £180,000.
Pension tax relief is one advantage that ordinary investments do not have. Whenever you pay into your pension, the government refunds the tax you paid on this part of your income. This amounts to a boost of at least 25% on every pension contribution – so every pound you pay into your pension instantly becomes £1.25. This is because £1.25 tax at the basic rate of income tax (20%) would be reduced to £1. Pension tax relief reverses this.
4. Save and invest money for the future
If people describe compound interest as the eighth wonder of the world, it’s because it really is pretty remarkable! Consider the maths underpinning it. For example, if you were to put £1000 in your savings account at an annual interest rate of 1.5% AER, you’d earn £15.10 (1.5% AER / Gross of £1,000) of interest in the first full year. So if you left your £1015.10 (£1000, plus £15.10 interest earned in the first year) in the same savings account, you’d earn £15.33 (1.5% AER / Gross of £1015.10) in the second year. This might not seem like much of a difference, but the impact of compound interest increases over time. This impact is even greater when starting with a larger amount. Regardless of how much you make, the sooner you get started, the more effectively it will start working for you.
A penny that doubled every day would be worth more than $5 million on day 30.
Historically, times such as these have been good times to invest: the dot-com bubble, the Global Financial Crisis and even – to a degree – Covid. There are always people savvy enough to leverage periods of volatility and use them as a springboard towards their own financial freedom.
The Consumer Prices Index rose by 6.7% in the 12 months to September 2023. So inflation is still more than three times higher than the Bank of England’s target rate. And people get hurt by inflation: people on fixed incomes, consumers, savers and those struggling to get started on building up their wealth. Inflation negatively impacts how far your money will go in the future. According to the Bank of England’s inflation calculator, goods and services costing £100 in 2020 now cost just over £121.
By not investing, you are losing money right now. In short, you cannot afford not to invest. And if you are in your 20s or even your 30s, you really are young enough to ride out this period of volatility.
An app on your phone can definitely help you squirrel away your loose change and get you into the habit of saving. It can even help you build and balance an investment portfolio based on your age and your attitude to risk. What it cannot do, however, is help you balance competing goals, deal with the financial impacts of changes in your circumstances, or help you navigate a path through too-good-to-be-true investment opportunities. Even if you are just starting out in your professional life, it is not too soon to talk to us about strategies for saving and investing.
At IQ, the investment strategy we recommend will be based on the information we glean about you as our professional relationship evolves over time. There are lots of things to consider – such as your earning potential, your health, your plans to buy house or even start a family. These are all factors that will be weighed up carefully in our conversations with you.
Our true value to you as high-level financial planners lies in what we do in addition to providing financial advice. It lies in helping clients answer questions about how much they need to save, and the tax obligations of various investment strategies. None of this can be replaced by an app.
5. Check in with us regularly
In the end, building your wealth for future you is a little like striving for net zero: no single strategy on its own is sufficient. The answer lies in making full use of all the options available to you, leveraging the right schemes and technology, getting into good saving habits… and accessing the right advice to make sure you are on track and that your approach is the right one for your current circumstances. The start of your career is an excellent opportunity to create a solid foundation for your financial future. Talk to us today so we can ensure that you don’t waste that opportunity!
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