BasicsSavings&Banking

How To Achieve Financial Freedom (5 Things You Can Do Today)

In this article, you’ll find out the importance of

  • Creating a budget
  • Emergency funds
  • Cutting your debts
  • Pension plans
  • Investing in yourself

Self-care extends far beyond meditation, pilates classes or healthy eating. While all these things may contribute to a healthier and happier future you, it’s just as important to practise financial self-care.

After all, what good will any of it be if you rack up unsustainable amounts of debt or end up broke in your old age?

Here are five ways you can secure financial freedom for your future self.

Create A Budget

A budget will help you plan your finances better and is the first thing anyone who wants to get to grips with their money should do.

Creating a budget will help you gain an understanding of how you spend your money currently, and help you find ways to change your spending habits to achieve your goals – whether that’s increasing savings or pensions contributions or paying down debt.

Don’t know where to start?

Don’t worry – it’s not as complicated as it may seem! Start by listing all your sources of income on a monthly basis, after tax.

If you’re employed with regular hours and no side hustles, this is fairly straightforward, as the information is on your pay slip or in your bank account. For freelancers, it can get a little more complicated.

For ease, start with your average income over the last 6 to 12 months, depending on how seasonal your work is.

Next, list all of your regularly occurring expenses each month, by category – for example, rent/ mortgage payment, utility bills, phone bill, transport, food and fitness / other subscriptions.

If you’re not sure how much you spend on each category – or even which categories to use – go through your last three months of bank/ credit card statements.

Many banking apps automatically break down your expenditure by category, which can be helpful – Lumio is one of them. Check out your Intelligent Wealth Mentor here!

The final step is to subtract your income from your expenses to get a view of how healthy your monthly finances are at the moment. Any money left over at the end of each month can be used for savings or to pay down debts. If you haven’t got as much money left as you’d like, then you can go back to each category and see if you are able to cut some of your expenses.

There are lots of ‘budgeting rules’ out there. Some people find it useful to first decide how much they want to set aside for savings and then only allow themselves to spend what’s left over (referred to as ‘paying yourself first’).

If you’ve got flexibility to cut your expenses then this could be a good way to ensure you save enough month to meet your goals.

Others budget according to % spend rules – e.g. live on less than 90% of your income or the 50/30/20 rule of expenditure (50% on rent and bills, 30% on everything else and 20% on saving including pensions).

See How to create a budget for more on how to budget and various budgeting rules to try.

Save Up For Emergencies

An emergency fund will give you a safety net so that you don’t need to reach for credit cards or dip into your overdraft if you are unable to work for a few months or have a large unexpected expense, such as a high car repair or medical bill.

This means you won’t materially worsen your financial situation by getting into debt when you’re experiencing a temporary blip in your finances.

While the optimum size of emergency fund will differ from person to person, a helpful rule of thumb is 3 to 6 months’ worth of expenses.

This is not necessarily the same as 6 months’ worth of post-tax income. Instead, it is the fixed expenses you incur each month that are not easy to cut without taking drastic action, such as rent payments, transportation and food shops.

Your gym membership, monthly beauty appointments or restaurant trips would not typically count as part of these – again, depending on your personal circumstances.

Cut Your Debts

Debts are a liability and burden your monthly budget.

Due to interest, you are likely to be paying back much more than you ever borrowed in the first place. This is particularly the case for credit cards and things like pay-day loans which charge the highest rates of interest (often 20% or more).

Be aware that making the minimum payment each month does not stop interest from being charged.

For example, someone with £5,000 in credit card debt at 17% APR making payments of £200 a month will end up taking 2 years and 7 months to repay the debt and pay £1,103 in interest.

Paying an extra £50 a month on the credit card bill would cut the overall repayment time to 2 years and the interest bill to £840.

 

Having excessive debts or unpaid bills negatively impact your credit score and hence might make it harder for you to borrow money for bigger purchases in the future, such as a house. For mortgage lending, while banks look at a variety of factors, with income being an important one, your creditworthiness will be taken into account as well. A low credit score can lead the bank to deem someone with a solid deposit and high income as not worthy of a loan – or increase the interest rate on any money lent. Ironically, of course, the higher interest rate will make it harder for that individual to pay down the debt in future.

A less talked about side effect of debt is the negative impact it can have on your mental health, with anxiety, depression, sleepless nights or drastic weight loss or gain among possible side effects. According to the Money Advice Service, one in six adults in the UK are at risk of ‘crisis debts’, with the problem most accute among renters, single parents, young adults in the 25-34 age group and parents with three or more children.

If you want help with managing your debts, visit www.moneyadviceservice.co.uk to find out about free help available to you in your area.

Invest In A Pension Plan

As boring as it may sound, it’s important to plan for your future regardless of how old you are.

Nowadays, more and more people are dreaming of retiring early, meanwhile changes to demographics, government spending pressures and changes to how pensions are funded mean that without forward planning, many of us won’t be ‘living large’ later in life.

Most people nowadays have what’s called a defined contribution pension plan, which means that your pension is not a fixed amount – it will depend entirely on the contributions made throughout your working life by you and your employer(s).

As boring as it may sound, it’s important to plan for your future regardless of how old you are.

This money will be invested and grow over time.

The younger you are, the better off you’re likely to be if you get started. This is due to compound interest – the effect of money growing each year due to investment income (interest and dividends), which grows further in future years as income grows on income.

The longer this effect has to work its magic, the more your money is likely to grow by the time you need to draw on it.

If you’re employed, aged between 22 and state pension age (68 if you’re 30 today) and earning over £10,00 annually your employer is legally obliged to contribute to your pension plan. As of April 5 2019, minimum employer contributions went up to 3% of pensionable earnings (the calculation of this depends on your individual scheme) and individual contributions rose to 5%. If you qualify for a UK State Pension, you can get up to £168.60 extra from the government under current rules. This obviously isn’t much and cannot be relied upon as rules may change over time.

Currently, the average pension pot for women aged 65 is £35,000. This is one fifth the size of the average man’s. The scary thing is that even this higher amount may not be enough for many people to live comfortably in their old age. See How To Retire Early In The UK: 9 Essential Tips for tips on saving for retirement.

Invest In Yourself – Focus On Your Health & Upskilling

These are (hopefully) no-brainers. The healthier you are, the fewer medical bills you are likely to have to pay for avoidable illnesses and conditions.

By healthier we mean eating less sugar, drinking less alcohol and generally having a well-balanced diet, while exercising regularly. Some life insurance companies are going so far as to reward members that exercise more by lowering the premium in exchange for completing certain activities.

Meanwhile, the better educated you are, the better your chances of a well-paid job, a career change or a side hustle.

This does not need to be formal education – it can be skills learned through workshops, online courses and even knowledge picked up through podcasts!

A number of online course providers have grown in popularity in recent years, offering short courses and even university-level degrees at a fraction of the cost, taught by leading academics around the world.

Investing in yourself will help you keep a relevant and sought-after skill set and keep you employable, at a good wage or salary.

Natacha Blackman
About author

Natacha Blackman has 8 years of experience in financial services across research, trading and sales at global investment banks. While working as a publishing research analyst, she covered European bank credit and advised institutional clients on investment strategies at both Morgan Stanley and Societe Generale. Natacha has passed all three levels of the CFA (Chartered Financial Analyst) programme.
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