Handling finances can be complicated, and it’s something that most people have difficulty with at some point in their lives. In fact, many people find themselves with more questions than solutions on how to manage their money and achieve financial stability.
However, finances don’t have to be overwhelming, and there are ways to feel more in control of your money by being informed and implementing strategies that will keep you on top of things.
Nina Appelgren, personal finance expert at Lånea, has answered some of the most frequently asked questions about personal finance to demystify some of the confusion around finances and provide guidance on how to make the most of your money.
How do I create a budget?
While creating a budget can be an individual task, there are steps that most people should follow to keep track of their money accurately and budget more efficiently.
Tracking income is the first step to creating a successful budget. This should include your annual salary including bonuses, any income from side hustles or freelance work, and any benefits that you may receive.
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By GlobalDataYou should then compile a list of all your potential monthly expenses. This will include rent or mortgage repayments, groceries, utilities and other bills such as phone and Wi-Fi bills, subscription services, leisure and transportation expenses.
From this, assign a specific amount of your salary to each expense. Prioritise the essentials and don’t forget to factor in savings. Ideally, you can save a portion of your annual salary – around 10-20% is a good amount to aim for.
Be sure to consider financial goals or future big purchases that you’re building towards, as you may want to set aside more money for these.
Try using spreadsheets or budgeting apps to help track your finances. Some people may opt to create their budget manually, or some may prefer to rely on technology – regardless of your preference, there are many tools at your disposal that can help you.
Remember, you can adjust your budget whenever you need to, or whenever your financial circumstances change.
What are the best ways to save money?
Many of us want to save more money than we already do, but it can be hard to determine what can go and what can stay.
The first thing to do is look at your budget and see what expenses you can do without. This may be something as simple as cancelling unused streaming services or other regular subscriptions that you no longer need.
Another way to incentivise your savings is by setting saving goals. This could be planning to put money into an emergency fund, holiday fund, wedding fund, big purchase fund or whatever you’re saving for. This will help with motivation as you’ll see that saving pot grow and feel closer to what you’re working towards.
Setting up automatic transfers can easily allow the money to flow from your current account to your savings account with limited effort, without having to remember to do it manually.
One of the best ways to save is by shopping smartly and mindfully. Look for deals, use coupons or discount codes, compare prices between shops and wait for sales if possible. Most importantly, think about whether you really want or need a purchase, how often you will use it and how long it will last you.
How do I choose a bank?
When deciding on a bank, consider your personal banking needs. This could be whether you want to go with a traditional or entirely digital banking service, proximity to a nearby branch or any specific features that you may require. Make sure you research what different banks have to offer, as some banks may have special benefits to opening an account with them.
You can also extend this to researching the reputation of each bank. Read customer reviews to find out the quality of other users’ experience, to get an idea of what your banking experience with them will be like.
If you are banking in the UK, ensure that you are picking a bank that is protected by the Financial Services Compensation Scheme (FSCS) which guarantee up to £85,000 of your money is protected in the event of bank failure. Ask questions about their services, fees and policies in order to be fully informed.
You can always ask friends and family about their experiences, visit banks and talk to representatives if you need more information.
What is a good credit score?
Credit scores fall between 300 and 850. Good is generally considered around 670-700 and up – 800 and over is excellent.
While credit score requirements may vary, having a good credit score will make you more likely to be approved for loans which you are likely to need for big purchases such as buying a house. In general, it will approve your access to borrowing and may also bring other benefits such as lower insurance and interest rates.
There are different factors that can affect credit scores, such as payment history, credit usage and length of credit history. It’s a good idea to regularly check the score and work to maintain or improve it.
What are ways to improve credit score?
To improve your credit score, it’s important that you are paying your bills on time, as a consistent payment history will keep it high. Similarly, reduce any debt where you can and pay them off as soon as possible.
Additionally, be sure to use your credit cards responsibly. Avoid maxing out, and don’t take on more debt than you can handle. Regularly check your credit report to ensure the information is accurate.
Where you can, limit new credit applications – only apply for them when necessary, as applying for a lot of credit within a short period can negatively affect your credit score.
It is important to note that if you have never taken out a line of credit, you won’t have a credit score at all.
Should I invest my money instead of saving?
Investing creates the potential to increase your money over time and receive higher rewards long term. However, it does not come without risk, as the value of investments tend to fluctuate, so you should make sure that you’re comfortable with this before proceeding.
Choosing whether to invest or not is a personal decision, and it isn’t right for everyone. If you decide that you want to, always make sure you have an emergency fund before doing so – this should ideally be 3-6 months’ worth of your salary. This will provide a safety net in case of unexpected expenses e.g. repairs, medical bills etc.
Consider your investment goals and the desired time frame. It’s often better to save for short term goals as they are more manageable and require less risk.
Most importantly, thoroughly research different stocks and bonds to invest in, and make sure you are happy with your choices. You can always consult with a financial advisor for personalised guidance if you’re having difficulty – this will allow you to make informed decisions and prevent you from over-investing.
What are the best ways to manage debt?
The first step to dealing with debt is looking at your budget to see where you can cut back and reallocate funds to paying off your debt. This may not go very far, but it is best to start somewhere manageable, as this will further motivate you to handle these debts. You should try to prioritise high-interest debt first to save money long-term and avoid accruing more interest payments.
Look into debt consolidation if you need to, which is where several loans are combined into one. This can make things simpler and may also reduce your borrowing costs and interest rates.
Try negotiating with creditors if you’re struggling as you may be able to agree on a lower interest rate, payment plan or settlement amount. If necessary, don’t be afraid to seek professional help as this may be the best route if you’re overwhelmed by debt.
How do personal loans work?
Personal loans are often used to fund big purchases, unexpected expenses, debt consolidation or other payments that you can’t afford.
You will have to apply through a bank, credit union or online lender. Info about credit history, income, debt and employment will all be relevant to how easily you can receive a loan. Your application will be assessed and approved based on factors such as these.
If you’re approved for a loan, you will be sent an offer with terms. This will include the loan amount, interest rate, repayment schedule and fees.
After accepting, the loan is issued to you, usually through direct deposit into your account. You can then work towards repayment through a monthly repayment schedule with a fixed interest rate.
How does interest work?
Interest is essentially the cost of borrowing money. In order to make money on loans, lenders charge an extra fee on top of the borrowed amount. This may be a fixed rate or may accumulate with time if the interest rate is variable.
For example, if you were to borrow £1,000 for a year at an annual interest rate of 5%, you would owe an additional £50, on top of the original sum, at the end of the year.
You may have simple interest, which is calculated only on the original amount borrowed, or compound interest, which is calculated on the initial amount as well as any accumulated interest.
What insurance do I need?
The insurance that you need will depend on your needs, requirements and where you live. For example, if you live in a country that doesn’t provide universal healthcare, you will need some kind of health insurance to cover any GP visits, prescriptions and medical bills.
If you own a car, you’ll need car insurance to help cover costs such as damage to your vehicle as this is required by law in the UK and Europe. Pet owners may need pet insurance to cover pet medical bills and other unforeseen pet-related expenses.
Life insurance can be taken out to cover funeral costs and income replacement and other expenses after death. If you have a disability, disability insurance will provide income replacement if you cannot work due to your disability.
Homeowners or renters will require insurance to protect property, and there are two main types of home insurance which have different purposes. Building insurance covers the physical structure of your home and any permanent fixtures, which you will likely need to take out as part of your mortgage agreement. Contents insurance, which covers the cost of your possessions and personal belongings in the instance that they are damaged or stolen, is optional.
Travel insurance is important if you plan to go abroad, to cover you in the event of a medical emergency or injury, stolen or damaged property, problems with missed or delayed transportation.
