Managing your money worries
The College provides a range of support which can be accessed to help the most of your financial resources. The information provided here is intended to be a general prompt for further thinking.
The Financial Health Institute defines financial health as ‘the dynamic relationship of one’s financial and economic resources as they are applied to or impact the state of physical, mental and social well-being’. Unfortunately a significant proportion of the population experience stress and anxiety due to financial worries. The Chartered Institute of Personnel & Development (CIPD) conducted a recent survey ‘Financial Well-being: The employee view (2017)’ and the results showed that 19% of respondents are losing sleep at night because they are worried about money. This translates into problems in all areas of life as well as negatively impacting on ability to concentrate at work and productivity levels.
Income and wellbeing
There is no scientific formula for calculating a level of income that will make us happy as everyone has their own unique set of circumstances. However a lot of research has been undertaken on the equation between income levels and happiness. The Centre for Well-being at the New Economics Foundation has found that at lower income levels there is a strong relationship between income and well-being. As you move up the income scale the correlation between income and well-being is not so strong. As long as basic living requirements i.e. food, shelter and clothing, can be met, then excess income does not increase our well-being exponentially. Research suggests that we don’t need to be rich to be happy but good financial management is key to ensuring that we do not become anxious about money.
Considerations and priorities
For some people, good financial management will be something that comes easily to them, for others the opposite will be true. Unfortunately, sometimes we don't pay attention to the financial situation and relatively small financial problems can quickly escalate and become a serious financial burden. As we go through the different stages of life there will be different considerations and priorities to take account of. These are examples that may be relevant at different life stages:
- 18 – 25 years concerns
Possibly single, saving for house deposit, learning to live on a budget, paying back debt from education, balancing an active social life and less consideration for the future and pension provision.
- Late 20’s to mid 40’s concerns
Possibly morgage payments, getting married, starting a family. Starting to think about savings, pension provision, managing debt and tackling big life events such as divorce.
- Late 40’s onwards
Possibly starting to prepare for later life and maximising pension. Paying for children’s university education, unexpected life events e.g. early onset of ill health, redundancy.
Managing your own money
Financial management can sound formal and people may imagine that it is only people who can afford to have a big investment portfolio that would need to consider financial management. However, financial management is a term that means managing your own money, whatever your circumstances. You don’t need to employ a financial advisor to start making a difference to your own financial management. A simple and easy way to get started is to sit down and make a list of your income on the left side of the page and your outgoings on the right hand side of the page. The outgoings can be categorised into rent/mortgage payments, weekly food bill including money spent on breakfast and lunch during the week, debt payments (credit cards, loan payments), regular bills (utilities, insurance, mobile phone, premium TV, council tax), clothing, social life. If you are working in full time employment you will most likely have your tax and national insurance deducted at source through PAYE and if you have joined the company pension scheme, the pension deductions will also be made at source, so there will be no need to make a separate list of these items as they will be deducted from your salary already. If you find that you are regularly spending more than you are earning and continually using an overdraft facility it is time to start looking more closely at the outgoings list to see if there are any easy changes that you can make. This small activity can have a big positive impact on your state of mind by making you feel empowered by taking control and taking steps to change your circumstances.
- Cars are often the second largest monthly outgoing after your mortgage or rent payments. Most new cars are bought on PCP (Personal Contract Plans). There are a number of ways you can save money or avoid expense on PCP's, or even terminate the agreement early if your financial circumstances change.
- With some PCP deals it is possible to walk away from a PCP deal by handing the car back at any time, providing you have already paid more than 50% of the loan value back.
- You can also sell the car privately, releasing the value locked into it to pay off the outstanding loan amount.
- You can part exchange the car for a cheaper model. The purchasing dealer will then settle the finance account on the vehicle.
If you have exceeded the mileage allowance on your PCP, you will avoid having to pay the mileage penalty by selling the car privately and paying off the Final Value Fee (FVF), or by part exchanging the car.
- At the end of a PCP deal, the car will often still be worth more than the FVF. At this point you often have the option to hand the car back to the finance company in lieu of paying the FVF and keeping the car. The finance company will sell the car and any monies made over the FVF will be send back to you. However, you will always get better value by selling the car yourself and using the money to pay off the FVF. The private marketplace will get a better price for the car than you will be offered in part exchange or by the Finance company.
If you intend to buy or rent a property, buy a car, obtain a loan or a credit card, or even buy a mobile phone, a good credit score is essential.
There are three main credit reference agencies used in the UK; Experian, Equifax, and CallCredit. All will provide you with a personal score for free, and a full credit report for a small fee. Every lender calculates your score and credit worthiness using their own criteria, set according to how much risk they are prepared to take, so no two scores from different sources are comparable. They all use one or more of the main credit reference agencies for their source data though, which makes these agencies opinion of your creditworthiness a good indicator of whether an application for credit will be accepted.
Obtain a full credit report to see what information the agencies hold on you, and check it is correct. Keep a regular eye on your score using the credit agencies free scoring services.
Tips for a healthy credit rating, or for boosting a poor rating include;
- Try not to use more than 50% of your available limit on credit card(s)
- Try to pay more than the minimum payment.
- Try not to use a credit card for cash withdrawals.
- Remember credit searches will lower your credit score for six months or more, regardless of whether you took out the credit product or not.
- Pay your bills on time to avoid a late payment fee.
Healthy debt management
If your debt is spiralling, you need to act sooner rather than later. Trying to consolidate debts etc. to reduce your outgoings and repayments is much easier whilst your credit score is still sufficient to give you the flexibility to obtain credit. Examples of things that can be done to reduce outgoings are;
- You could transfer debt from a high interest credit card to a new card that has a 0% introductory offer, or consolidate several credit cards into one loan so that you are making a fixed repayment without the option to easily increase the debt amount. Instead of using payday loans, with very high interest rates, search out your local credit union.
These are often funded and run by local authorities e.g. newhammoneyworks.co.uk and offer much better terms and lower costs.
- If you are missing payments already, you could make use of the Citizens Advice Bureau (CAB), who may be able to help you talk to your lenders and come to an arrangement that allows you to repay your debts at a lower rate.
- Cancel monthly outgoings that aren't needed, used or essential. Music streaming accounts, Video streaming accounts, satellite and cable TV subscriptions. These can add up to hundreds of pounds per year.
- Never go food shopping when you are hungry, you'll tend to buy more than you need. Also take some time to monitor how much food you actually throw away each week and see if there is a pattern. It may be better for you to go shopping every few days rather than doing a big weekly shop as this will make it easier to plan the food that you actually need more efficiently. This will also add your contribution to food sustainability and helping to reduce levels of food wastage.
- Work out how much you would like to spend each week on entertainment and everyday items, such as breakfast and lunch. Once you have established the amount, take the cash with you in your purse or wallet and leave your debit or credit cards at home. If we are constantly using “wave and pay” technology it can sometimes seem as if we are not actually spending any money. If we have to pay for things with hard cash, it will make you more aware of exactly how much you are spending on a daily basis. The price of a morning coffee and croissant and then a take away lunch could add up to £2,300 per year if you spend £10 per day for 5 days per week over 46 weeks (allowing for 6 weeks holiday per year). This money could go a long way to paying for a nice holiday instead or help to pay off outstanding debt.
If you have a mortgage this is likely to be the biggest expense that you will have in your monthly outgoings. Make sure that you are on the best deal possible and not just paying the base or standard interest rates. The best way to do this is to book an appointment with your current mortgage provider and they will be able to give you a number of different options that will be available for you. Issues to consider will be:
- Do you have a repayment or interest only mortgage?
If you have an interest only mortgage it is important that you have a separate and reliable savings account so that you can be sure that you will be able to pay for the final lump sum that is due when the mortgage term ends. It may be a ‘false economy’ to have an interest only mortgage as although your monthly payments to the mortgage provider will be cheaper as they will consist of the interest payment only, you will need to be saving a regular amount to build up the lump sum final payment. Throughout the mortgage term, your Loan to Value (LTV) ratio will be fixed as you will never reduce the amount of capital outstanding on the mortgage until the mortgage finishes. This means that you will not have access to such a wide range of mortgage products at lower rates throughout the term of your mortgage. Many people now opt for a repayment mortgage deal as this brings the security that the mortgage will be fully paid off at the end of the term.
- Do you have a fixed or tracker interest rate?
If you have a tracker interest rate your monthly payments will not be fixed as the interest rate will fluctuate when the Bank of England (BoE) sets a new interest rate. The tracker rate will generally be 2-3% higher than the BoE rate.
If you would prefer to have certainty over the amount of your monthly mortgage payments a fixed deal will mean fixed monthly payments. The final deal that will be available to you will depend upon your LTV amount (a lower LTV amount will mean that you have access to lower rates and a wider range of products) and the length of your mortgage term remaining.
- Have you built up an overpayment reserve?
If you have made any agreed overpayments on your mortgage so that you have built up an overpayment reserve there are a number of options that you can consider when you switch your current mortgage deal. You may choose to capitalise the overpayment by borrowing it back, underpaying for a period of time or taking a payment holiday. However if you do capitalise on your overpayment reserve, this will be added to your LTV amount, meaning that the amount will not be deducted from your outstanding capital balance. Therefore you may wish instead to lower your LTV balance if you do not specifically need to utilize the overpayments. This will mean that you still have access to a wider range of products at a lower rate.
- Payment holidays
If you find that you are struggling temporarily to pay your mortgage payments it is important that you contact your mortgage provider as soon as possible so that you don’t miss your monthly payments. It may already be a part of your mortgage deal that you can have holiday payments for a period of time that will help you get back into a more stable financial position. If you think that you may struggle at some point in the future it is important to build the payment holiday facility into your considerations when switching your current mortgage deal.
- Arrangement fees for switching your current deal
There will usually be a few choices of new mortgage product available either with an upfront arrangement fee or without. It is usually the case that mortgage products with an upfront fee incur slightly lower interest rates than those without a fee. It is important to carefully consider whether it is worth paying the upfront fee as over a 3 or 5 year period, the savings in interest payments will often not add up to the amount of the upfront fee so that it would actually be financially detrimental to choose the product with the upfront arrangement fee. In this situation simply ask your mortgage provider to tell you what the monthly payments would be under the product with the arrangement fee and what the monthly payments would be under the produce with no arrangement fee. It is then a simple calculation to work out what the difference between the 2 products would be over a 3 to 5 year period.
Huge savings can be made by changing utility providers or deals at the expiration of each promotional deal. At the end of any initial discount deal providers will revert your account back to their base cost, which can be much higher. Always search for a better deal using uswitch.com