6 ways to manage your money

It is very important to keep tabs on your finances, otherwise they will catch up with you, you wont have any idea where you money is going and you wont be able to make the most of your money.

Step 1 - Understanding your in-takes and outgoings.

Firstly you need to budget your finances, which is very simple.  All you need to do is work out what your monthly income after tax and National Insurance is and take away your monthly spending.  It might help to think of your essentials first, such as your mortgage, electricity, gas and phone bills, and then focus on your regular spending, such as food and clothes.  Don’t forget to be realistic.  Just think of all the random spending that happens each month, such as birthdays and holidays and evenings out. Remember to take them into account as well.  

Step 2 - Keep track.

Now you must keep track of your spending.  Buy a notebook and jot down everything you spend for three moths, or buy a receipt stack and keep every single receipt to see where all your money is going.  If you find that you’re spending more that what you earn, make a pact with yourself.  Maybe you don’t need those extra pair of shoes or CD as soon as it comes out.  Remember that once debt starts to mount up it soon becomes a vicious circle.

Step 3 – Create an account for emergencies only.

Always keep enough money in your current account to cover bills and regular spending, with a safety margin of at least a few hundred pounds.  You can then start saving a regular amount, the easiest way being to set up a standing order to a savings account, such as a mini cash Isa.  These usually pay a good interest rate and you wont pay any tax on the interest.  Aim to build up at least two or three times your monthly expenditure.

Step 4 – Ensure your dependants are protected.

A life changing moment like having children or a death in the family could make it hard for you to make ends meet, so it is worth taking out life insurance as the state provides little assurance.  The main type of life insurance is known as term insurance where you pay a premium for a specified period, and if you die before the policy expires it will pay a lump sum.  You and your family can decide whether to invest all or some of it to give them an income.  If you don’t want a lump sum, and don’t want to rely on an investment for income, you can choose a family income benefit policy, which simply pays out an income.  What ever you decide make sure you shop around to find the best deal for your circumstances.  Finally, don’t forget to draw up a will that will appoint legal guardians for your children, you want to rest assure knowing that if anything does go wrong your family are in safe hands.

Step 5 – Don’t forget to protect your income too.

If you are too ill to work, you will typically be given £66 a week for the first 28 weeks from the state, and after that you will get incapacity benefit, not that generous either.  So it is important you have cover.  You may already have it if you’ve taken out mortgage payment protection insurance, if not then why not ask your employer what sort of protection they offer.

Income protection insurance is the most popular and suitable for most.  It pays out a monthly income until you recover from your illness, or die, or reach the end of the policy term.  However, it can be expensive.  Normally in the region of £25 - £35 for a young person in a low risk job, and anything up to £210 for a middle aged person.

Critical illness insurance pays out a tax-free lump sum if you are diagnosed with a stroke, cancer or heart attack for example.  The main disadvantage with this being that it doesn’t pay out for minor problems such as stress.

Whatever insurance you choose, be sure it’s the right one for you.  It is a tricky and often expensive business so try getting help from a financial advisor.

Step 6 – Get a pension scheme.

These days you are unable to rely on the state pension if you wish to have a quality way of life after you retire, because at the moment the state pension is approximately £79 a week.  So the sooner you begin your pension the better.  Start by thinking about how much income you are likely to need in retirement.  Deduct all the monthly spending you wont have during this time, such as mortgage repayments, and add on the costs of replacing benefits of your job, such as running your car and bonuses.

If your employer funs a pension scheme known as ‘occupational pensions’, then join it.  You will gain no end of benefits such as your employer making contributions towards your pension; you will have life insurance and an additional pension for your partner if you should die whilst you are still working.  If your work place doesn’t offer this scheme, or you don’t want to join it, then you will need to get a private pension.  If you are finding it difficult to plan your pension scheme then get some professional advice, it is a financial necessity for your later years in life.