17th September 2019 at 1:07pm
As much of the country heads back to university or school, it’s never too late to give your financial skills a bit of a brush up.
Here are seven money lessons, whatever your age and stage.
1. Start saving by working to a budget
Learning how to budget effectively can help you get in good financial shape. And that might mean doing a bit of revision on your spending and budgeting.
Firstly, consider how much you need to cover your regular outgoings –everything from mortgage or rent and bills, to food, shopping, travel and socialising.
If you need to find ways to reduce your outgoings, start by shopping around to get the best deals on bills and any loans. Price comparison sites like MoneySavingExpert.com are useful to get good deals on major spends like insurance and utilities. You can use apps to track your spending and many retailers now offer discounts as long as you sign up for their app.
Give yourself top marks when you’ve saved. Then look at how much money you have left and consider setting up a standing order to ‘squirrel’ some of this away into a savings account.
2. Get the low-down on bank rates and inflation
The Bank of England decides on the UK Bank Rate, known as the ‘base rate’, but what does that actually mean for your money?
The base rate affects the rates banks charge us to borrow money or that they pay on our savings. It’s currently 0.75% (as of early September 2019) compared to 6% at the turn of the century. It’s generally ‘cheaper’ to borrow money but the interest you get on any savings is also low.
If interest rates rise, it gets more expensive to borrow money but it can become more financially rewarding to save.
Inflation explainer: We hear a lot about ‘inflation’ in the news. Simply, it is the rise in the cost of the everyday goods and services we buy and it’s currently 1.7% (the 12-month inflation figure to August 2019). If your savings get a lower amount of interest than the rate of inflation, the real value of your money is reducing.
So, if you had £100 in a bank for a year with a 1% interest rate, you’d have £101. However, with inflation at 2% the cost of £100 worth of everyday goods would have risen to £102 in that time.
That’s why knowing about inflation matters and the old saying about keeping your money as cash under your mattress just doesn’t make sense, at least not over the long term.
Check the interest rates you’re currently getting and shop around to see if you could get better.
3. See if an ISA could give your numbers a boost
Most people want or need a mix of savings throughout their lives, including savings accounts, pensions and ISAs (Individual Savings Accounts).
Since being introduced 20 years ago, ISAs, have grown in popularity as they let you save your money tax-efficiently – and how much you can save each tax year has rocketed to £20,000.
The most up-to-date figures show £69bn was subscribed to adult ISAs in 2017-18 (an increase of £7.8bn on the previous year), with Junior ISAs on top of that.
In an ISA, any interest you earn from cash savings or investment gains you make are tax-efficient. Any investments you hold in a Stocks & Shares ISA are also free from Capital Gains Tax – and you don’t have to declare ISAs on your annual tax return as there’s no tax to pay when you access your money.
ISAs normally give you access when you need it. You can have more than one type of ISA each year, taking a mix and match approach as long as you’re within your overall £20,000 allowance.
You can save into a Cash ISA and earn interest, invest into a Stocks and Shares ISA to get the potential for growth, or do both.
Do bear in mind that a Stocks and Shares ISA is an investment and can go down as well as up in value and you could get back less than you paid in.
There are different types, whether it is the Junior ISA for young children or a Lifetime ISA for first-time house buyers and topping up retirement savings, so it’s important to have one that suits your needs.
Try this simple calculator to see how much your Stocks & Shares ISA could be worth in the future.
4. Make your money work harder
If you choose to invest your money, as opposed to simply saving it, you’re giving it a chance to grow in value. Generally the sooner you start and the longer you stay invested, the more opportunity your money has to grow.
The final value of your investments will depend on three main things – how much you pay in, how your investments perform and how long you’re invested for. The longer you can keep your money invested, the more you’re likely to get back at the end.
Your investments can go down as well as up in value, especially in the short term, and they could be worth less than originally invested. It makes sense to review your investments regularly to check they’re right for you.
This ‘Why invest?’ article explains more.
5. Learn about the wonder of compound interest
The effect of compound interest on your money can be powerful.
Let’s say you save £100. The interest you get will be added to that £100. And the next year, the interest you get is based on your original £100 plus the interest you got before. You earn interest on the interest.
If you leave your savings, this happens year on year – it’s the ‘snowball’ effect. It may be small over one year, but over time compounding could really build up your savings.
In a similar way, compounding also applies to investments, as you could get growth and then growth on top of growth and the original investment.
Investments can offer higher growth potential over the longer term, but their value can go down as well as up, and could be worth less than originally invested.
6. Be comfortable with the R-word
(That’s retirement, by the way.) For most people, as soon as you enter the world of work you’ll likely be paying into a workplace pension so it is important to know what it is, why it matters and what you’ve got.
In simple terms, a pension is a long-term savings plan and a tax-efficient way to save money during your working life. You pay in, and your employer contributes too. That money is then invested, usually in funds, and has the chance to grow over time.
How much you get when you’re ready to take your pension benefits – currently from age 55 – will depend on how much you invest, how your pension investments perform and how long you invest for (see our graphic below). And let’s not forget your employer pays in too and there are tax breaks on what you save.
Find out more about saving for retirement and use the retirement tool to calculate how much money you might need to fund the retirement lifestyle you would like.
7. Test and upgrade your financial history
When you apply for mortgages, credit cards, loans and overdrafts, among other things, lenders normally run a credit check on you to calculate the risk of lending you money.
It’s why having a good credit score counts.
From helping you qualify for the best interest rates and terms for a mortgage or loan to influencing your chances of a new phone contract, it can affect you in more ways than you might imagine.
Some ways to improve your credit score include paying your bills on time, paying off your debt and only applying for new credit accounts when you need to. Registering to vote also makes a difference as electoral details are recorded with lenders able to confirm your name and address.
Laws and tax rules change. The value of tax benefits will depend upon individual circumstances.
The information here is based on our understanding in September 2019 and should not be taken as financial advice.
Standard Life accepts no responsibility for the information contained in the websites referred to in this article. These are provided for general information only.