Here’s Magenta’s top 10 ideas about how to build wealth and be better organised with your money.
Calculate your net worth
Your net worth is a measure of your financial health.
It’s the result of your total assets minus the amount you owe, and you should check it at least twice a year as it is also a measure of your progress.
The simplest way to calculate your net worth is to add together your cash accounts; investments; pensions and property values and then subtract from this total, all your debts – student loan; car loan; credit card; mortgage etc.
Approximate house values can be found on Zoopla.
Change your mindset about money
Contrary to popular belief, building wealth isn’t necessarily dependent on the size of your income, it has more to do with psychology and mindset than you may think. This should strike you as good news, since anyone can change their thoughts, beliefs, and habits to reflect those of the rich.
There are some interesting articles about this in Business Insider, about the how the rich think here and habits of the rich here.
Figure out where all of your money is going
Keeping tabs on where your money is going, whether fixed expenses like rent or mortgage payments and travel costs or discretionary spending like dining out and travel, is a crucial part of mastering your money.
Setting up a spreadsheet or using a service like Moneyhub can help you make cuts where necessary and even set you on a path to early retirement if that is what you want. It can be as simple or as detailed as you like, and it often only takes a few minutes to set up.
Prioritise your debt
Credit card debt accrues the highest interest rates and therefore paying it down should be prioritised above all other financial goals.
The maths speaks for itself: Say you have £5,000 of credit card debt at an 18% interest rate and say you happen upon £5,000 of money. If you split the use of that £5,000 (half to establish an emergency fund, half to pay down credit card debt), you still have £2,500 of credit card debt and £2,500 of money sitting in cash earning probably nothing.
The £2,500 of credit card debt at an 18% interest rate, costs you £450 a year. The emergency fund earns almost nothing in interest so you’re down £450.
But what if something comes up before you’ve paid it all off? If you happen to run into a true emergency, you can always put that on a credit card, but otherwise, work on getting rid of outstanding credit card debt off as quickly as possible.
You’ll save more paying off the debt than you’d earn if you invested it, whether in a high-yield savings account or the stock market.
Pay yourself first — automatically
When I first started work in the financial services world, I was told that everyone needs to save (or pay to themselves) 10% of their income BEFORE paying anything to anyone else.
This means 10p for every £1 earned and experience tells me it is rarely missed, once people get into the habit of paying themselves first.
If you pay yourself first, it takes the effort out of manually saving and ensures that your money will grow exponentially over time thanks to the power of compound interest.
Real wealth is built when money is moved and saved first, before you can spend it.
How much money you should be saving?
The money you “pay yourself” should go toward the two most important personal expenses: a retirement fund that’ll carry you through your post-work life and an emergency savings fund to cover any unexpected expenses that crop up along the way.
David Bach’s chart below shows how much we should be saving in every decade of our life, broken down into retirement savings and emergency savings.
Typically, the older you get, the more you earn and spend and if you lose your job, it can take longer to find a job that replaces that income. When in doubt, with emergency money, more is always better and it should be kept in cash.
How to invest in the stock market
Though it may seem intimidating, anyone can be an investor. You don’t have to be a stock-picking genius or earn a massive income to make great returns over the long term.
Generally, the best way for the average inexperienced person to make money in the stockmarket is to invest in index funds.
An index fund holds many different stocks to reduce investment risk, and operates with minimal expenses and high tax efficiency.
A great way to invest spare change to give you a flavour of investment without much initial exposure, is to use Moneybox, where you can round up debit card expenses to the next pound and invest via an index fund.
Always remember that in the long-term you are better off being invested in the stockmarket even if things are volatile, than staying out of it.
Understand how your partner views money
As uncomfortable as they may be, money conversations are a crucial aspect of a healthy relationship and arguments about money are a leading predictor of divorce.
Try to understand the financial background of your partner and find out how they feel about money and what they consider to be its purpose in their life. This will allow you to understand how they make financial decisions and how you can work together to make a success of your money.
Then you can discuss the more concrete details, such as who is responsible for paying which bills, whether you want a joint account, and what your specific money goals are as a couple.
How much money you need to keep in your current account
We would say that a good rule of thumb is to keep at least one month of net pay in your current account at all times. You don’t want to keep much more in there as the interest rates are very poor, or in most cases zero. Look for an account with no monthly fee and no minimum balance. If there are monthly fees, make sure they are paying for something – like travel insurance or breakdown cover etc.
Some current accounts pay interest or have other benefits like the Santander 123 or Halifax Reward accounts. We generally recommend that as long as you have enough to cover a month’s worth of bills, you move the rest to a high-interest account so you can earn a bit more interest on your money.”
What kind of insurance you need?
If you have a car, you have to have car insurance by law. If you own a home, it is sensible to buy house and contents insurance.
But what else should you consider?
If you have dependents and/or a mortgage you should have life cover and critical illness cover to pay a capital sum or income in the event of death or serious illness. The cost of this will be determined by the amount of cover you need; your age; your health and how long you need the cover for.
You should also consider Income Protection insurance, which can pay out a proportion of your income until your retirement age if you cannot work due to illness or accident.
When everything is going well, insurance seems like an unwelcome extra cost, but when things go wrong, it can make all the difference and be a real investment.
If you would like any of these ideas further and would like advice or guidance, please do not hesitate to contact the team for a friendly chat.