Ahead of the Imperial Women’s Network Personal Finance Workshop, 22 September, alumna Andrea Solana (MBA 2014) shares her top tips for keeping on top of your personal finance:
‘Personal finance is not always as much of a priority for ourselves as it should be. It will often remain perpetually at the bottom of our ‘to-do’ list. Having a plan may seem complicated. But, it doesn’t need to be. Below are a few tips for gaining control of your personal finances.
The single most important thing to do is understand exactly what comes in and out of your Current Account each month. General areas of expenditure typically include things like:
- Household utilities
- Transportation/commuting costs
- Discretionary expenses (gifts, restaurants, pubs, sports, etc.)
Review your expenditure whilst thinking about what things are most important to you. You may need to review financial transactions regularly for a few months before you have a good sense of spending patterns. If you find yourself spending on things that ultimately don’t impact your personal utility or standard of living, this may be an area for you to save on in the future.
The earlier you begin saving the better. The benefits of compound growth are significant and means your money won’t need to work as hard for you. If you aim to make savings part of your monthly budget, you will find that your spending adjusts accordingly without you even realising it. Save automatically through monthly direct debits into separate accounts. This includes allocations for specific savings goals and retirement. If your employer offers matching on retirement contributions, you should seek to try to take advantage of this as it is effectively free money.
A few rules of thumb will help you to save and spend at the same time:
- Aim for mortgage/rent costs to be no more than 28% of your gross income. This can be useful to keep in mind as you think about how much house you can afford.
- Allocate at least 20% of your income towards financial priorities such as building emergency savings, paying off debt and adding money towards retirement.
- Budget around 30% of income on lifestyle discretionary expenses.
When assessing financial priorities, you should aim to set aside three to six months of expenses in a liquid and accessible account. These represent emergency cash reserves. If you have any debt, conventional wisdom is to focus on paying those loans with the highest interest rate first whilst making minimum payments on all other sources of debt.
It is important to remember that it is possible to have too much cash; especially in today’s low interest rate environment. If you have enough set aside to meet emergency cash reserves and short-term financial goals, then one should think about building a diversified investment portfolio. Costs eat into investment returns over time. Therefore, you want to seek assets that are as low cost as possible but also meet your objectives.
Once you have structured a diversified portfolio, it is important to review the portfolio once or twice a year to ensure that your overall asset allocation still meets your goals and objectives. Periodic rebalancing will be needed to ensure you don’t become too concentrated in areas of the market that have performed well over that time period.
As you move forward, remember to keep an eye on your net worth as well as your credit report (through an annual credit check). It can help you monitor your progress (or lack thereof) towards meeting your financial goals. You can ensure nothing looks unusual and give yourself the opportunity to make adjustments when needed.’
To find out more about making your money work for you, come along to the Personal Finance Workshop on Thursday 22 September.
Risk Warnings and Important Information
The value of investments can fall as well as rise. You may not get back what you invest.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.