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- Herausgeber: John Wiley & Sons
- Kategorie: Ratgeber
- Sprache: Englisch
Your friendly guide to financial success
Managing your money and making informed financial decisions for you and your family can be challenging. You're not alone if you find it difficult to understand tax, plan for retirement, create a workable budget, or protect your wealth from unexpected events. This edition of Personal Finance For Dummies, tailored for a UK audience, offers an easy-to-read guide to improving your financial situation, no matter your income level. You'll learn how to set financial goals, invest wisely, and protect your assets while still enjoying life.
Inside the book:
- Expert advice on making sound investments that minimise risk and maximise returns
- Clear explanations of UK tax rules so you can save money by using all the allowances you're entitled to
- Practical tips and real-world examples to help you plan for a comfortable retirement
Managing your money and building a financially secure future doesn't have to be confusing! Grab a copy of Personal Finance For Dummies, UK Edition for the straightforward, down-to-earth advice you need to help you create the life you've always imagined.
Sie lesen das E-Book in den Legimi-Apps auf:
Seitenzahl: 592
Veröffentlichungsjahr: 2025
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Personal Finance For Dummies®
To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Personal Finance For Dummies Cheat Sheet” in the Search box.
Table of Contents
Cover
Table of Contents
Title Page
Copyright
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1: Getting Started with Personal Finance
Chapter 1: Embracing Financial Literacy
Understanding Everything Financial Literacy Includes
Talking Money at Home
Identifying Unreliable Sources of Information
Developing Good Financial Habits
Chapter 2: Establishing a Financial Foundation
Understanding Your Cash Flow
Using Different Accounts
Budgeting to Boost Your Savings
Understanding and Improving Your Credit Score
Chapter 3: Establishing and Achieving Goals
Creating Your Own Definition of Wealth
Prioritising Your Savings Goals
Building Emergency Reserves
Saving to Buy a Home or Business
Funding Kids’ Educational Expenses
Saving for Big Purchases
Preparing for Planned Borrowing
Preparing for Retirement/Financial Independence
Part 2: Spending Less, Saving More
Chapter 4: Managing Where Your Money Goes
Examining Overspending
Assessing Your Spending
Chapter 5: Reducing Your Spending
The Keys to Successful Spending
Smarter Spending
Chapter 6: Understanding Types of Borrowing
Choosing Carefully When You Really Must Borrow
Exploring Types of Borrowing
Chapter 7: Dealing with Debt
Using Savings to Reduce Your Consumer Debt
Decreasing Debt When You Lack Savings
Exploring Solutions to Debt Problems
Finding Reputable and Free Sources of Debt Support
Stopping the Spending/Consumer Debt Cycle
Chapter 8: Maximising Your Savings
Working Out How Much to Save
Saving for Short-Term Goals
Saving for Longer-Term Goals
Understanding How Inflation Eats Your Savings
Part 3: Building Wealth Through Investing
Chapter 9: Managing and Reducing Your Tax
Understanding the Tax You Pay
Making the Most of Your Tax-Free Allowances
Tax-Friendly Investing
Estate Planning
Where to Go for Help with Tax
Dealing with a Tax Investigation
Chapter 10: Considering Important Investment Concepts
Establishing Your Goals
Understanding the Primary Investments
Shunning Gambling and “Get-Rich-Quick” Vehicles
Understanding Investment Returns
Sizing Investment Risks
Diversifying Your Investments
Leaving You with Some Final Advice
Chapter 11: Understanding Your Investment Choices
Slow and Steady Investment: Bonds
Building Wealth with Ownership Vehicles
Off the Beaten Path: Investment Odds and Ends
Chapter 12: Investing in Funds
Understanding the Benefits of Funds and ETFs
Exploring Various Fund Types
Learning How to Invest in Funds
Choosing a Managed Portfolio or Going DIY
Selecting the Best Funds
Deciphering Your Fund’s Performance
Chapter 13: Investing for Retirement
Why Invest in Pensions
Looking at Types of Pensions
Allocating Your Money in Pensions
Transferring Pensions
Chapter 14: Investing for Children
Investing for Children versus Saving in Cash
Exploring Ways to Invest for Children
Estimating University Costs
Working Out the Student Finance System
Strategising to Pay for Educational Expenses
Chapter 15: Investing in Property: Your Home and Beyond
Deciding Whether to Buy or Rent
Financing Your Home
Finding the Right Property
Making an Offer
After Your Purchase
Chapter 16: Working with Financial Planners
Surveying Your Financial Management Options
Deciding Whether to Hire a Financial Planner
Finding a Good Financial Planner
Interviewing Financial Advisers: Asking the Right Questions
Learning from Others’ Mistakes
Part 4: Insurance: Protecting What You Have
Chapter 17: The Three Laws of Buying Insurance
Law I: Insure for the Big Stuff; Don’t Sweat the Small Stuff
Law II: Buy Broad Coverage
Law III: Shop Around and Buy Direct
Dealing with Insurance Problems
Chapter 18: Insurance on You: Life, Income, and Health
Providing for Your Loved Ones: Life Insurance
Preparing for the Unpredictable: Income Protection Insurance
Getting the Care You Need: Health Insurance
Chapter 19: Covering Your Assets
Insuring Your Home
Car Insurance 101
Insuring Your Pets
Part 5: The Part of Tens
Chapter 20: Survival Guide for Ten Life Changes
Starting Out: Your First Job
Changing Jobs or Careers
Getting Married
Buying a Home
Having Children
Starting a Small Business
Caring for Ageing Parents
Divorcing
Receiving a Windfall
Retiring
Chapter 21: Ten Free Resources
MoneyHelper
Pension Wise
Citizens Advice
FCA ScamSmart
Gov.UK
StepChange
MoneySavingExpert
The Open University
Which?
Boring Money
Glossary
Index
About the Authors
Connect with Dummies
End User License Agreement
List of Tables
Chapter 3
TABLE 3-1 Retirement Planning Questionnaire
Chapter 4
TABLE 4-1 Hire Purchase (HP) vs. Personal Contract Purchase (PCP) in the U.K.
TABLE 4-2 Detailing Your Spending
Chapter 6
TABLE 6-1 Cost Comparison for Borrowing £5,000 Over One Year
Chapter 7
TABLE 7-1 Comparing Debt Solutions
Chapter 8
TABLE 8-1 How Much Are People Putting Into Cash versus Investment ISAs?
Chapter 9
TABLE 9-1 2025 Income Tax Bands and Rates
TABLE 9-2 Tax Rates on Capital Gains, Dividends and Savings Interest (2025-26 Ta...
TABLE 9-3 Inheritance Tax Rates and Thresholds (2025-26 Tax Year)
Chapter 10
TABLE 10-1 Reduction in Purchasing Power Due to Inflation
TABLE 10-2 The Difference a Few Percent Makes
TABLE 10-3 Stocks versus Bonds
TABLE 10-4 Allocating Long-Term Money
Chapter 12
TABLE 12-1 The Impact of High Fees on Your Investments’ Values
Chapter 13
TABLE 13-1 Allocating Pension Investments
Chapter 14
TABLE 14-1 How Much to Save for Higher Education
Chapter 15
TABLE 15-1 An Example of Possible Maximum Borrowing and the Potential Cost of a ...
TABLE 15-2 Cost of Owning versus Renting over 30 Years
Chapter 18
TABLE 18-1 Life Insurance Ready Reckoner
List of Illustrations
Chapter 5
FIGURE 5-1: Reducing your spending can yield large sums if you save or invest t...
Chapter 8
FIGURE 8-1: This chart shows the purchasing power of £10,000 in savings over 10...
Guide
Cover
Table of Contents
Title Page
Copyright
Begin Reading
Index
About the Author
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Personal Finance For Dummies®, UK Edition
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
Copyright © 2024 by Eric Tyson.
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Published simultaneously in Canada
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Library of Congress Control Number: 2025941803
ISBN 978-1-394-35450-4 (pbk); ISBN 978-1-394-35451-1 (ebk); ISBN 978-1-394-35452-8 (ebk)
Introduction
Welcome to Personal Finance For Dummies, U.K. Edition! Now in its 11th iteration, this book has been updated and specifically adapted for the needs of U.K. readers. More than two million copies of prior editions of this book were bought, and readers and reviewers alike have been pleased. This book also previously earned the prestigious Benjamin Franklin Award for best book of the year in business. However, I never rest on my laurels. So the book you hold in your hands reflects more hard work and brings you the freshest material for addressing your personal financial quandaries.
You’re probably not a personal finance expert, for good reason. Historically, Personal Finance 101 hasn’t been offered in our schools. Even if you received some financial education and acquired some financial knowledge over the years (most likely from a wise family member or friend), you’re likely a busy person who doesn’t have enough hours in the day to get everything done. You want to know how to diagnose your financial situation efficiently (and painlessly) to determine what you should do next. Unfortunately, after figuring out which financial strategies make sense for you, choosing specific financial products in the marketplace is often overwhelming. You have literally thousands of investment, insurance, and loan options to choose from. Talk about information overload!
To further complicate matters, you probably hear about most products through advertising which, by law, is supposed to be “clear, fair and not misleading.” Of course, some ethical and outstanding firms advertise, but so do those that are more interested in converting your hard-earned income and savings into their short-term profits. And they may not be here tomorrow when you need them.
Despite the development of new media and new financial products and services, people keep making the same common financial mistakes — procrastinating, neglecting to plan, wasteful spending, falling prey to scams, failing to do sufficient research before making important financial decisions, and so on. This book can keep you from falling into the same traps and get you going on the best paths.
As unfair as it may seem, numerous pitfalls await you when you seek help for your financial problems. The world is filled with biased and bad financial advice. You don’t want to suffer the consequences of taking poor advice! All too often, financial advice ignores the big picture and focuses narrowly on investing.
Because money is not an end in itself but a part of your whole life, this book helps connect your financial goals and challenges to the rest of your life. Personal Finance For Dummies provides a broad understanding of personal finance that includes all areas of your financial present and future: spending, tax, saving and investing, insurance, and planning for major goals like buying a home, running your own business, investing for your future, and so on.
Even if you understand the basics, thinking about your finances in a holistic way can be difficult. Sometimes you’re too close to the situation to be objective. Your finances may reflect the history of your life more than they reflect a comprehensive plan for your future.
You want to know the best places to go for your circumstances, so this book contains specific, tried-and-proven recommendations. I also suggest where to turn next if you need more information and help.
About This Book
Here are some of the updates I’ve made to the book:
Information on how to navigate changing economic conditions and make the most of your money, including making decisions about property
Complete coverage of recent tax law changes and how to navigate upcoming rules affecting individuals, families, and small businesses
Updated investment information covering funds, exchange-traded funds, stocks, bonds, and more
Expanded coverage of self-employed retirement savings strategies
Updated coverage of higher-education options, costs, and benefits
The latest information on the State Pension and what it means in terms of how you should prepare for retirement
Revised information on where and how to find the best insurance deals
Coverage of the best personal finance apps and fintech (financial technology) options and solutions
Updated coverage of how to use and make sense of the news and financial resources (especially online resources)
Aside from being packed with updated information, another great feature of this book is that you can read it from cover to cover if you want, or you can read a particular chapter or part without having to read what comes before it. Handy cross-references direct you to other places in the book for more details on a particular subject. If you like, you can skip the sidebars (shaded boxes) and text marked with the Technical Stuff icon; that info is interesting but nonessential.
Note: This book is for informational purposes only and does not constitute financial advice. You should consult a qualified adviser for personalised recommendations.
Foolish Assumptions
In writing this book, I made some assumptions about you, dear reader:
You want expert advice about important financial topics (such as paying off and reducing the cost of debt, planning for major goals, making wise investments), and you want quality information and answers efficiently.
You want a crash course in personal finance and are looking for a book you can read cover to cover to help solidify major financial concepts and get you thinking about your finances in a more comprehensive way.
This book is basic enough to help novices get their arms around thorny financial issues. But it challenges advanced readers as well to think about their finances in a new way and identify areas for improvement.
Icons Used in This Book
The icons in this book help you find particular kinds of information that may be useful to you.
This lightbulb flags strategy recommendations for making the most of your money.
This icon denotes information that’s definitely worth remembering.
This icon marks things to avoid and points out common mistakes people make when managing their finances.
The magnifying glass nudges you to consider doing some additional research on your own.
This nerdy-looking guy appears beside discussions that aren’t critical if you just want to understand basic concepts and get answers to your financial questions. You can safely ignore these paragraphs, but reading them can help deepen and enhance your personal financial knowledge.
Beyond the Book
In addition to the material in the print or e-book you’re reading right now, this product also comes with some access-anywhere online goodies. Go to www.dummies.com and type in “Personal Finance For Dummies, U.K. Edition Cheat Sheet” in the search box to discover a list of pointers that can help you think about the role of money in your life and start achieving your financial goals.
Where to Go from Here
This book is organised so you can go wherever you want to find complete information. Want advice on investing strategies, for example? Go to Part 3 for that. Feel the urge to get your insurance needs in order or to check on what type of insurance you really need? Head to Part 4.
You can check out the table of contents to find broad categories of information and a chapter-by-chapter rundown of what this book offers, or you can look up a specific topic in the index. And, if you think you need additional help beyond this book, see Chapter 16 for advice on using financial planners and Chapter 21 for finding out what other resources are out there to assist you.
If you’re not sure where you want to go, you may want to start at the beginning with Part 1. It gives you all the basic info you need to assess your financial situation and points to places where you can find more detailed information for improving it.
Part 1
Getting Started with Personal Finance
IN THIS PART …
Understand your financial literacy.
Lay the building blocks of your financial foundation.
Set and accomplish personal and financial goals.
Chapter 1
Embracing Financial Literacy
IN THIS CHAPTER
Defining what financial literacy includes and means
Looking at what your parents and others taught you about money
Questioning reliability and objectivity
Overcoming real and imagined barriers to financial success
In its 2024 Financial Lives survey, the Financial Conduct Authority (the U.K. regulator) found that 6.5 million people (12 percent of U.K. adults) have low financial capability. The majority of these people reported feelings of stress and overwhelm when having to deal with financial services firms, and many delayed making money decisions because of it. People who don’t understand finance are less likely to have pensions and other savings pots, and to hold less in them when they do. Being financially illiterate is a huge disadvantage in life.
I know from my many years of work as a personal financial counsellor and teacher and now as a writer that many people do indeed have significant gaps in their personal financial knowledge. Although we have greater access today to more information than in prior generations, the financial world has grown more complicated, and there are more choices, than ever before.
Unfortunately, most of us don’t know how to manage our personal finances because we were never taught how to do so. Our parents may have avoided discussing money in front of us, and the subject is not always covered in much detail at school. Even if it is, young learners may not be able to absorb and retain the information given because it does not yet feel relevant to their lives.
Some people are fortunate enough to learn the financial keys to success at home, from knowledgeable friends, and from the best expert-written books like this one. Others either never discover important personal finance concepts, or they learn them the hard way — by making lots of costly mistakes. People who lack knowledge make more mistakes and, the more financial errors you commit, the more money passes through your hands and out of your life. In addition to the financial costs, you experience the emotional toll of not feeling in control of your finances. Increased stress and anxiety go hand in hand with not mastering your money.
This chapter examines what topics fall under the heading of “financial literacy” and where people learn about finances, and helps you decide whether your current level of knowledge is holding you back. You can find out how to improve your financial literacy and take responsibility for your finances, putting you in charge and reducing your anxiety about money. After all, you have more important things to worry about, like what’s for dinner.
Understanding Everything Financial Literacy Includes
What exactly does being literate in personal finance mean? The following are three subjects to become acquainted with:
Managing your everyday transactions:
I cover accounting for money that passes through your hands and your current accounts in the short term.
Investing for the long term:
I discuss the best ways to invest money for better returns and longer-term purposes.
Protecting your money:
I provide an overview on the generally less popular but highly important topic of protecting your income and assets with insurance.
In addition to these major topic areas, the field of personal finance includes plenty of jargon and terminology, the mastery of which will boost your confidence and your decision-making skills. I provide definitions along the way and include a handy glossary at the end of this book.
Starting with the basics: Budgeting and transaction accounts
If you’re like most people, as you earn money, much of it too quickly passes through your hands or, more specifically, into and out of your current accounts. As you surely know, a hefty chunk of money you earn is siphoned off to pay tax. What’s left is used to cover your monthly living expenses, such as housing, food, utilities, clothing, and hopefully for some entertainment and recreation. Chapter 2 delves into the different kinds of transaction accounts and how to use them.
Managing your monthly living expenses (including tax) and budget and establishing and working towards financial goals takes time and effort. Parts 1 and 2 help you accomplish those important tasks.
Making your money work for you: Investing
When you are spending less than you earn and are able to save new money each month, you will have the pleasant but challenging problem of deciding where and when to invest your savings. Or maybe you already have additional money you want to invest and make it work harder for you.
The world of investments is complicated and filled with pitfalls. That contributes to some people leaving their excess money sitting in their low-interest current accounts by default. While you could do worse (by losing money in poor investments), you can certainly do better — and you probably need to do better in order to accomplish your financial goals. Part 3 covers all things investing and helps you master that important task.
Protecting your income and assets: Insurance
When you’re earning money and have some assets (a car, a house, and so forth), insurance protects against the loss of that income and your assets. If others rely on your employment income, you likely need some life insurance. Even without dependants, you probably rely on your own income and should have adequate income protection.
Assets like a car and a home also require sufficient protection using insurance policies. See Part 4 for the important details on insurance.
Talking Money at Home
I was fortunate — my parents taught me a lot of things that have been invaluable throughout my life, and among those things were sound principles for earning, spending, and saving money. My parents had to know how to do these things because they were raising a family of three children on (usually) one modest income. They knew the importance of making the most of what you have and of passing that vital skill on to your kids.
However, my parents’ financial knowledge did have some gaps. I observed firsthand the struggles my late father endured handling some retirement money after being laid off from a job when I was a child. In subsequent years, this situation propelled me to learn about investing to help myself, my family, and others.
In many families, money is a taboo subject — parents are not honest with their kids about the limitations, realities, and details of their budgets. Some parents I talk to believe that dealing with money is an adult issue and that children should be insulated from it so they can enjoy being kids. Others readily admit the many holes in their financial knowledge and don’t feel comfortable teaching their kids about personal finance for this reason. In too many families, kids hear about money only when disagreements and financial crises bubble to the surface. This begins the harmful cycle of children having negative associations with money and financial management.
In other cases, parents with the best of intentions pass on their bad money-management habits. You may have learned from a parent, for example, to buy things to cheer yourself up. Or you may have witnessed a family member maniacally chasing get-rich-quick business and investment ideas. Now, I’m not saying that you shouldn’t listen to your parents. But in the area of personal finance, as in any other area, poor family advice and modelling can be problematic.
Think about where your parents learned about money management and then consider whether they had the time, energy, or inclination to research choices before making their decisions. For example, if they didn’t do enough research or had faulty information, your parents may mistakenly have thought that banks were the best places for investing money or that buying stocks was like going to Las Vegas. (You can find the best places to invest your money in Part 3 of this book.)
In still other cases, the parents have the right approach, but the kids do the opposite out of rebellion. For example, if your parents spent money carefully and thoughtfully and often made you feel denied, you may tend to do the opposite, buying yourself gifts the moment any extra cash comes your way.
Although you can’t change what the educational system and your parents did or didn’t teach you about personal finances, you now have the ability to find out what you need to know to manage your finances.
If you have children of your own, don’t underestimate their potential or send them out into the world without the skills they need to be productive and happy adults. Start early — even very young children can be taught basic concepts of spending versus saving, and can have fun learning how to budget their pocket money. And see Chapter 14, which discusses options for investing money for children.
Identifying Unreliable Sources of Information
Most people know they’re not financial geniuses. So they set out to take control of their money matters by reading about personal finance or consulting a financial adviser.
But reading and seeking advice to find out how to manage your money can be dangerous if you’re a novice. Misinformation can come from popular and seemingly reliable information sources, as I explain in the following sections.
Understanding the dangers of free financial content online
In addition to being able to quickly access what we want, the other major attraction of the internet is the abundance of seemingly free websites providing piles of apparently free content. Appearances, however, can be decidedly deceiving!
While there are exceptions to any rule, the fact of the matter is that the vast majority of websites offering “free” content are rife with conflicts of interest and quality problems due to the following:
Advertising:
Any publication that accepts advertising has a potential conflict of interest because it may not want to publish articles that would upset its advertisers. Such a mindset, however, can stand in the way of telling consumers the unvarnished truth about various products and services. For example, credit-card companies aren’t very interested in advertising somewhere that publishes articles highlighting the negatives of credit cards.
Advertorials:
Too many website owners are unwilling or unable to pay real writers for quality content and instead publish articles that are written and provided by advertisers who may have paid for the opportunity. These pieces of “content” are known as
advertorials
and, in the worst cases, aren’t even clearly labelled as advertisements, which is precisely what they are.
Affiliate relationships:
Many companies pay “referral fees” to websites that bring in new customers. Here’s how that practice causes major conflicts of interest. On a financial website, you read a glowing review of a particular financial product or service. And the site provides a helpful link to the website of the provider of that product or service. Unbeknownst to you, when you click on that link and buy something, the seller kicks money back to the “affiliate” who reeled you in. At a minimum, such relationships should be clearly disclosed and detailed in any review.
Insufficient editorial oversight:
Most established, quality print publications usually have numerous editors who oversee the publication and all its articles. This structure helps ensure the accuracy of what gets into print (although bias, such as political bias, isn’t necessarily controlled). Unfortunately, the shoestring budget on which many websites operate precludes these quality-control checks and balances. Sites operated by nonexperts proffering advice place you at great risk.
Lack of accountability:
In part because of a lack of editorial oversight, there’s also often a lack of accountability for advice given online. This situation is especially problematic on the numerous sites that are run without disclosure of who is actually in charge of the site and/or who is writing the articles. Although such anonymity may be helpful to the site and its content providers, it’s certainly not in your best interests because it prevents you from checking out the background, qualifications, and track record of the providers.
Recognising the dangers of following financial gurus (and celebrities)
While new mediums may come while others fade, the same types of dangers continue to trip up people with their money.
Before you take financial advice from anyone, examine their background, including professional work experience and education credentials. This is true whether you’re getting advice from an adviser, writer, talk show host, or TV financial reporter.
If you can’t easily find such information, that’s usually a red flag. People with something to hide or a lack of something redeeming to say about themselves usually don’t promote their background.
Of course, just because someone seems to have a relatively impressive-sounding background doesn’t mean that they have your best interests in mind or have honestly presented their qualifications.
You can’t always accept stated credentials and qualifications at face value, because some people lie (witness the billions lost to hedge fund Ponzi-scheme-man Bernie Madoff). You can’t easily sniff out liars. You can, however, increase your chances of being tipped off by being sceptical (and by regularly reading the “Guru Watch” section of www.erictyson.com).
Celebrities were used big-time as endorsers in recent years in the problematic cryptocurrency space. You’ve perhaps heard of the now defunct and bankrupt offshore cryptocurrency exchange FTX, the founder of which is now serving a very long prison sentence. FTX spent hundreds of millions of dollars on advertising and paying celebrity endorsers like basketball stars Shaquille O’Neil and Stephen Curry, NFL quarterbacks Trevor Lawrence and Tom Brady, comedian Larry David, supermodel Gisele Bündchen, and tennis great Naomi Osaka.
In some of the advertisements for FTX, the well-paid celebrity endorsers joked about not knowing much about cryptocurrencies but then suggested that that was why they used FTX, implying that FTX was the expert. In other ads, some celebrities acted like they were calling friends to ask if they too were going to invest through FTX. Lawyers in the U.S. have filed a class action lawsuit against the celebrities for being bought off, failing to disclose large endorsement fees, and misleading the public to invest billions of dollars in FTX, which turned out to be a fraud. In the U.K., there are strict rules about the promotion of financial products by regulated businesses but, as the regulator only registers U.K.-based cryptocurrency exchanges for anti–money laundering checks, there is little in the way of consumer protection for British consumers trusting their money to companies like these.
Publishers pandering to advertisers
Thousands of publications and media outlets — including websites, blogs, podcasts, radio, TV, magazines, and newspapers — dole out personal financial advice and perspectives. Although some of these “service providers” collect revenue from subscribers, virtually all are dependent — in some cases, fully dependent (especially the internet, radio, and TV) — on advertising spend. Although advertising is a necessary part of capitalism, advertisers can taint and, in some cases, dictate the content you read, listen to, and view.
Be sure to consider how dependent a publication or media outlet is on advertising and read the small print for an explanation of how they make money. “Free” publications are the ones that most often create conflicts of interest by pandering to the advertisers from which they derive their revenue.
Developing Good Financial Habits
Once you understand the basic concepts and know where to buy the best financial products when you need them, you’ll soon see that managing personal finances well is not much more difficult than other things you do regularly, like tying your shoelaces and getting to work each day.
Regardless of your income, you can make your money stretch further if you practice good financial habits and avoid mistakes. The lower your income, the more important this is.
Personal finance involves much more than managing and investing money. It also includes making all the pieces of your financial life fit together; it means lifting yourself out of financial illiteracy. Like planning a holiday, managing your personal finances means forming a plan for making the best use of your limited time and money.
Intelligent personal financial strategies have little to do with your gender, ethnicity, or marital status. Everyone needs to manage their finances wisely. Some aspects of financial management become more or less important at different points in your life but, for the most part, the principles remain the same for everyone.
Knowing the right answers isn’t enough. You have to practice good financial habits just as you practice other good habits, such as brushing your teeth or eating a healthy diet. Don’t feel overwhelmed. As you read this book, make a short list of your financial marching orders and then start working away. Throughout this book, I highlight ways you can overcome temptations and keep control of your money rather than letting your emotions rule you. (I discuss common financial problems in Chapter 3.)
What you do with your money is quite a personal matter. In this book, I try to provide guidance that can keep you in sound financial health. You don’t have to take it all — pick what works best for you and understand the pros and cons of your options.
Throughout your journey, I hope to challenge and even change the way you think about money and about making important personal financial decisions — and sometimes even about the meaning of life. No, I’m not a philosopher, but I do know that money is connected to many other parts of our lives.
Chapter 2
Establishing a Financial Foundation
IN THIS CHAPTER
Sizing up where your money comes from
Understanding current, savings, and investment accounts
Creating a budget to see where your money really goes
Taking stock of your credit history
What are the basic building blocks for establishing your financial foundation? Understanding cash flow, knowing the different account types, creating a realistic budget, and learning how to improve your credit score are all important.
You need to understand how to manage your spending and cash flow, which is the difference between your income and your outgoings, because having positive cash flow (meaning you earn more than you spend) lets you work towards future financial and personal goals.
Having a solid grasp of the different types of accounts through which your money may pass will help you choose those with better terms and potential returns. Current accounts and savings accounts are offered by banks and other types of financial institutions. Many financial institutions also offer investment accounts, which makes choosing even more overwhelming.
You'll also need to know how to set up a budget. This may sound boring and restrictive, but a budget doesn't have to be — in fact, it can set you free to spend money on things you want, while making sure all your essential bills are paid.
Finally, you should understand how to build and improve your credit score in case you want to borrow money to accomplish important goals such as buying a home or starting a business.
Understanding Your Cash Flow
Every month, you have money coming in and money going out. Most people have never had sufficient training in how to manage their personal finances in order to do it well. Enter this book!
Your cash flow, over a specific period, such as a month or a year, is simply the difference between your income coming in and your expenditures going out. If it’s positive — that is, your income exceeds your spending — you have money left over which you could save or invest. When your cash flow is negative — in other words, when your spending is greater than your income — you’re either burning through savings or accumulating debt.
Uncovering where your money goes
Brushing your teeth, eating a balanced diet, and exercising regularly are good habits. Spending less than you earn and saving enough to meet your future goals are the financial equivalents of these habits.
Despite having relatively high incomes compared to the rest of the world, many people in the U.K. have a hard time saving a solid percentage of their incomes. Why? Of course, part of the problem is that wages have not grown as fast as inflation, so incomes are lower than they need to be to buy essentials. But, even for people with healthy salaries, it's easy to struggle simply through overspending. This can happen without you realising. It's why having a budget is so important, so you can see where you might be frittering away money and take steps to pull it back. To build financial security, you need to continuously spend less than you make. If you aren't doing this right now, you need either to reduce your spending or increase your income. For most people, the former is easier to do than the latter.
The first step to saving more of the income that you work so hard for is to figure out where that income typically gets spent. Do a spending analysis (see Chapter 4) if any of the following apply to you:
You aren’t saving enough money to meet your financial goals. (If you’re not sure whether this is the case, see
Chapter 3
.)
You feel as though your spending is out of control, or you don’t really know where all your income goes.
You’re anticipating a significant life change (for example, marriage, leaving your job to start a business, having children, or retiring).
The immediate goal of a spending analysis is to figure out where you typically spend your money. The long-range goal is to establish a good habit: maintaining a regular, automatic savings routine. Even if you're already a good saver, scrutinising your spending could be a useful exercise to identify any areas where you're wasting money, such as regular subscriptions you don't use or services where you could get a better deal by shopping around. This doesn't mean obsessing about where every penny goes, or becoming mean and miserly. Even if you don't change a thing, it's empowering simply to know exactly where and how you are spending your money.
Saving what you need to achieve your goals is what matters most.
Sizing up your income
In addition to reining in your spending, you can boost your cash flow by finding ways to earn more money. Even if you're currently employed, you may be interested in branching out to run your own business or starting a side hustle alongside your day job (if your employment contract allows).
Investing in your career
In my work with financial counselling clients over the years and from observing friends and colleagues, I’ve witnessed plenty of people succeed working for employers. So I don’t want to leave you with the impression that financial success equates to starting your own small business or buying or investing in someone else’s small business.
You can and should invest in your career. Here are some time-tested, proven ways to do that:
Networking:
Some people wait to network until they’ve been made redundant or are really eager or desperate to change jobs. Take an interest in what others do for a living and you’ll learn and grow from the experience, even if you choose to stay with your current employer or in your chosen field. In addition to personal networking, connect with people in your industry on social channels such as LinkedIn, Discord or Slack.
Making sure you keep learning:
Whether it’s reading quality books or other publications or taking online courses, find ways to build your knowledge base.
Considering the risk in the status quo:
People are often resistant to change and get anxious thinking about what can go wrong when taking a new risk. I know when I was ready to walk away from a six-figure job with a prestigious management consulting firm and open my own financial counselling firm, some of my relatives and friends had difficulty understanding why I’d walk away from that. That’s not to say that they didn’t have some valid concerns; they just weren’t really considering the risks inherent in my staying put and didn’t see the upside of my small-business venture.
Securing a side hustle
If your regular or full-time job leaves you with some free time to work even more, developing a side hustle may be worthwhile. Take inventory of your skills and interests. Brainstorm about what types of part-time work would enable you to put most of your skills and interests to work. You’re only limited by your imagination (and regulations/laws) as to different ways you can make some money.
You may find that your side hustle could grow into more of a full-time endeavour and allow you to leave behind your current job, if that’s of interest to you. It could also lead to a good source of revenue during retirement. Some people simply like having more than one stream of employment income. Regardless of the reason, having a side hustle can make for a more interesting work experience and help to hedge your bets employment wise, especially if your current full-time work is in an industry or with a company that is in decline.
Using Different Accounts
When income comes to you and you need to pay bills and find somewhere to park excess savings, you’ll want to have financial accounts with trustworthy and secure companies. Historically, banks and building societies have been the most often chosen institution, but now fintech companies which offer current accounts may also appeal to you. Fintech is short for “financial technology” and refers to companies that use technology to automate or improve financial services. Companies such as Revolut, Starling, and Monzo offer app-based current accounts; the latter two are fully regulated banks.
This section gives you a quick overview of the main account types.
Current accounts
Current accounts are best used for depositing your monthly income and paying your bills. They will come with a debit card, and sometimes an overdraft facility.
Here’s how to get the most from your current account:
Consider how you will use the account.
If you often hold a large balance, you could choose a current account which pays a good rate of interest on cash sitting in your account. If you often dip into your overdraft, you’ll want an interest-free agreed overdraft facility. If you travel a lot, you might prioritise an account that gives you a good deal on overseas spending. If you make a lot of purchases with your debit card, an account that pays cashback on spending might suit you. Think about how you will use your account and this will help you choose the best one for your needs.
Look past short-term perks.
To grab your custom, some banks will offer juicy cash incentives when you switch to them, or other perks such as a linked fixed-term regular saver paying a high interest rate. While these bonuses are great, they are short-lived and shouldn’t be the only reason you switch to a bank. Make sure the account will work for you in the long run too. Remember that lenders like to see stability, so staying with the same provider for a number of years could work in your favour if you plan to apply for credit soon.
Don’t dismiss packaged accounts.
Why pay a monthly or annual fee for a current account when you could get one for free? Good question, but hear me out. Packaged accounts that come with free or discounted subscriptions to services you already use could save you money. Revolut and Monzo, for example, both offer different tiers of packaged accounts which include insurance, subscriptions to fitness plans, dating apps, streaming platforms, food delivery services, and more. Crunch the numbers to work out whether a packaged account might be worth paying for.
Make the most of a basic bank account.
Some banks will run a credit check when you apply for a current account with them. If you have defaults or late payments on your credit file, you might be rejected for the account you want. However, you should be offered a basic bank account. This is a no-frills current account that won’t have any borrowing facilities such as an overdraft. You can use it to build a stable banking history which could contribute towards improving your credit profile (more on this in the later section “
Understanding and Improving Your Credit Score
”). Once you’ve achieved this, you can reapply for the current account of your choice.
Savings accounts
Savings accounts are a good home for your excess cash, but you’ll want to choose one that pays the best interest rate you can find. The interest rate is how much the savings account provider adds to your pot of money when you deposit it with them. Over time, the interest can build up nicely if you leave your savings untouched. An important consideration with savings is what they are for and when you might need them. If you’re saving for an unspecified future emergency, you’ll probably want an easy-access (also called instant-access) account so you can take your money out whenever you want.
Fixed-term and notice accounts
If you’re saving for a specific future goal, such as a house deposit or a new car, you might know at what point you will want to access the money. In this case, choosing a fixed-term or notice period savings account may get you a better rate of interest. A fixed-term account (sometimes called a savings bond) might lock your money away for a year or more, and you may have to pay a penalty to withdraw your money early. A notice account requires you to give 30, 60, or 90 days’ notice, for instance, to make a withdrawal. It’s also important to think about the amount of money you’ll be putting aside — some accounts will have a minimum deposit amount, and others will have a maximum. Best-buy tables on price comparison websites can help you compare key features, and you can search by deposit amount. If you’re saving for a house deposit, you could consider a Lifetime ISA which was designed specifically for that purpose and offers a free bonus when you save. (Find more on the Lifetime ISA in the nearby sidebar, “The Lifetime ISA.”)
Regular saver accounts
Another option could be a regular saver; banks sometimes offer these as a perk when you open a current account with them. They may pay higher interest rates than other types of savings account, but the catch is you can only pay in a certain amount each month for a fixed period (typically a year) and there may be restrictions around withdrawals. But if you want to put away a few thousand and build a regular savings habit, this type of account might be worthwhile.
More on savings accounts in Chapter 8.
Tax on your savings
You also need to think about tax. In the U.K., most people won’t have to pay tax on the interest their savings earn because of the personal savings allowance. This allowance lets basic-rate taxpayers earn £1,000 a year in interest tax free, and higher-rate taxpayers £500 a year. Additional-rate taxpayers (the highest earners) don’t get an allowance.
Individual savings accounts (ISAs)
Another way to save without being taxed is by making the most of individual savings accounts (ISAs). You can choose a cash ISA or a stocks and shares ISA to save in cash or invest in financial markets. With ISAs, you can pay in £20,000 each tax year with no tax due on any interest your savings earn, or any gains your investments make. A lot of ISAs are now “flexible,” meaning you can withdraw money and put it back within the same tax year without affecting your ISA allowance.
Investment accounts
You can open an investment account through an online investment platform, stockbroker, trading app, wealth management company, robo-adviser, or bank. Usually these include an option to pick a ready-made portfolio (a portfolio is a collection of investments) if you don’t feel confident in choosing underlying investments yourself. You’ll usually be offered a general investment account (GIA) or a stocks and shares ISA. The former will be taxable so the latter is probably a better option if you have some ISA allowance available.
Understanding how to best invest your money given your personal and financial goals is perhaps the most important aspect of managing your money. Please see Part 3 for more information and details.
THE LIFETIME ISA
If you’re aged 18 to 39, you could open a Lifetime ISA (LISA) to save towards a house deposit or retirement. You can pay in up to £4,000 a year (and either save in cash or invest it), which counts towards your total annual ISA allowance of £20,000. You’re able to keep contributing to a LISA until age 50. The government gives you a free 25 percent bonus on your savings each year, so you could get as much as £1,000 of free money per year. You can only use the money to buy your first home (and there are conditions attached) or for retirement (so you must be aged 60 or over). Withdraw money for any other reason and you’ll have to pay a 25 percent penalty, so you lose your bonus and a little of your own savings.
Budgeting to Boost Your Savings
When most people hear the word budgeting, they think unpleasant thoughts — like those associated with dieting. But budgeting doesn’t have to mean restriction — it simply helps you understand where your money is going so you can make informed decisions about your spending.
The first step in the process of budgeting, or planning your future spending, is to analyse your current spending (refer to Chapter 4). Once you’ve done that, decide how much more you’d like to save each month. If there’s not enough money coming in to meet your savings goal with your current level of spending, you have some choices to make. Budgeting is really about recognising you have a finite pile of money, and prioritising what you will do with it.
Lots of great budgeting apps and tools are available that can help you get organised. My personal favourite is You Need A Budget (YNAB). There’s an annual fee and it feels quite complicated to start with, but once you get your head around the zero-based budgeting method, it’s brilliant. You are encouraged to budget everything you have, down to zero (hence the name) so that every penny has a job. You should also plan for your “true expenses,” so not just the monthly bills but future expenses that come around annually or even less frequently, such as birthdays, car insurance renewals, or upgrading old tech. You’ll be saving for Christmas in January but, when it rolls around, you’re prepared, and there’s no need to get into debt. If you want to start off simply with budgeting, there’s no need to buy an annual subscription to an app. You can log your income and expenses on a piece of paper or a spreadsheet; there’s no right or wrong way so do whatever works for you. It’s important not to guess at all your spending amounts in different categories — go through your bank and credit-card statements for the last year and divide by 12 to get an average monthly figure. Your budget won’t be useful if it’s not based in reality.
Looking closely at your spending patterns should help you identify where you’re wasting money and if there is anywhere to cut back or shop around for a better deal. No, you don’t have to ditch your gym membership, but could you switch to a cheaper plan and put the difference straight into savings?
Budgeting is all about priorities and funding what matters to you.
Understanding and Improving Your Credit Score
If you expect to apply for borrowing of any type and get a competitively low interest rate, you should understand your credit report and credit score and how to improve each. A credit report is basically your credit history, while a credit score is a three-digit score based on the information in your personal credit report.
Deciphering how lenders use credit reports and scores
Most people borrow money at various times in their life, whether it’s to buy a home (or other property), to finance a small business, to pay for educational expenses, or for other purposes. When you want to borrow money, lenders examine your credit report to determine how responsible you’ve been in the past with credit and to help them decide whether they should lend you money (and if so, how much to charge you based on your past behaviour with credit).
Specifically, lenders examine your history of credit usage in your credit report. This information tells the lender when each of your accounts was opened, what the recent balance is, your track record of making payments on time, and whether you’ve defaulted on any loans. A credit report also tells a prospective lender where else you’ve been applying for credit most recently. Even if you’re not applying for borrowing, you may need to pass a credit check to take out a new phone contract, secure a rental property, or switch energy supplier.
You credit score is a number a credit referencing agency has come up with based on its analysis of your credit history. It may be useful for you to know, but it is unlikely that lenders will rely on it when making lending decisions. They will be more interested in how you have managed previous credit commitments. What’s more likely is that the credit referencing agency will use your credit score to market other products to you.
In the U.K., there are three big credit reference agencies, which each have their own credit scoring systems:
Experian — uses a score from 0 to 999
Equifax — uses a score from 0 to 1,000
TransUnion — uses a score from 0 to 710
You don’t need to get too hung up on your credit score. While lenders might consider it, ultimately they use their own approval criteria when deciding whether to lend to you, and you won’t know what this is. The way to maximise your chances of being approved for credit is to do the following:
Manage any existing credit responsibly.
Set up automated payments so you never pay a bill late.
Get on the electoral roll.
Make sure there are no errors on your credit file.
Don’t keep applying for credit if you’ve recently been rejected.
