Money Basics: Personal finance 101
Mr Micawber’s oft quoted recipe for happiness from David Copperfield is not a bad foundation for the DIY investor:
‘Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.’
Here we look at some of the basics you should consider before you start to build an investment portfolio.
Old Wilkins clearly knew a thing about budgeting and a very good place to start a journey towards financial freedom is by setting a budget – spend less than you earn and save or invest the difference.
It is a good discipline to keep a spreadsheet of income and expenditure and to start to look at items of expenditure that may be non-essential. Consistently spending more than you earn is not sustainable but if you find there is a surplus that could be put to work in your investments.
Whilst borrowing may be an inevitable part of modern life, servicing expensive debt is rarely conducive to a successful long term investment strategy; you’ll almost certainly pay out more to cover your debts than you’ll earn from your investments, and you should try to pay off debt as soon as possible. The less you borrow the less interest you’ll pay and the less vulnerable you’ll be to a rise in interest rates.
It is also prudent to ensure that you have a rainy day fund to cover up to six months’ household expenditure in the case of emergency; albeit currently meagre, an instant access Cash ISA will at least deliver some tax free interest on your deposit whilst being available at any time you might need it.
Make a will – The UK is suffering from ‘wills apathy’, with more than 30 million adults failing to make provisions for when they die. Two thirds of those aged between 35 and 54 and one third of those over 55 are living without a will, despite 92% of people having a firm idea of who they would like to see their money go to when they die.
But dying intestate (without a will) means the government will decide the order of who gets what from your estate – and if no one comes forward then the government will take the lot.
Not having a will in place could also result in inheritance tax being due before the estate is released, so grieving families may be forced to take out expensive loans in order to release the assets.
Those over 50 should consider a Lasting Power of Attorney (LPA) which appoints someone of your choice to manage your finances if you are unable to do so yourself for reasons of physical or mental infirmity.
This is also the time to protect your family’s financial security in the event of unforeseen events.
Ensure that you have enough critical illness, unemployment or life insurance to pay off your mortgage and other debts and provide for your family.
Insurance is often seen as a necessary evil, but by ensuring you have sufficient cover in place it may be that your dependents receive a handy lump sum at precisely the time they need it most; you may even find that you are currently duplicating sickness or life assurance cover that comes as part of the terms of your employment, in which case, you’ll have a little something more to put into the investment pot.