Taking care of your financial health
We all know how crucial it is to focus on our health for longevity and happiness. But being in control of your money is just as important. Taking the time to review your income and spending can also improve your wellbeing in the long term. Here’s how to get started.
When is borrowing money a good idea?
Three ways to be a super saver
The basics of budgeting
No matter how much money you earn, having a simple budget will provide you with the tools to spend without guilt, and build up a financial safety net. Getting started can seem overwhelming, but the first thing to do is understand what money you have coming in, where it goes each month and how much is left after bills. Write down your income and expenses and then the values that are most important to you. Would you like to start saving for a house deposit or holiday? Or perhaps taking up a certain hobby is on your bucket list? Deciding upon these first factors will give you a 360 degree view of your finances and reveal every penny of expenditure in black and white.
Once you know how much money you have after bills, set a spending and saving budget.
Using prepaid cards is one of the techniques which can be used to manage a budget with ease. So, what are prepaid cards? In a nutshell, they have to be preloaded with money just like a pay-as-you-go phone, so you can’t go into an overdraft. They can be used just like a debit card, and many come with apps that boast clever spending features too.
Another budgeting technique is to split your spending money into different jars for different purposes such as shopping or socialising. This can be done physically, with cash in envelopes, or using budgeting apps designed to help you save towards your goals. Some prepaid cards available in the UK also come with apps which include money jars or savings pots. Whatever you decide, it’s good to have a visual indicator of how much money you are spending. It’s important to budget sensibly, without leaving yourself short, so be realistic about how much you spend, and build in a small buffer fund if you are in a position to do so.
Budgeting doesn’t have to be boring! Take on the challenge with a friend or relative to add an element of accountability, or use our handy guide on ways to make budgeting more fun to make the process even more rewarding. As mentioned above there are also many apps which make it easier than ever before to set a budget, so why not take a look at some of the best budgeting apps UK to help you manage your money.
Building your credit score
The questions ‘what is a good credit score?’ and ‘what is a bad credit score?’ are always among the most searched-for terms online. And with good reason: having a good credit score and credit history in the UK is helpful if you are thinking of getting a credit product, such as a credit card. It means you are more likely to be accepted by lenders and potentially eligible for a better interest rate.
Checking out your credit score is a timely thing to do when reviewing your overall financial fitness. You can do this for free online and it will provide a snapshot of your financial history. Each credit reference agency uses a different credit score range but they all start at zero, which is the lowest score. A good credit score at Experian, one of the biggest credit reference agencies, is from 881 to 960. At Equifax it is from 531 to 810. Lenders need to see your track record for paying back debt in order to lend to you.
Ways to improve your credit score, include opening a current account and staying out of any overdraft. You could also consider a credit card - but make sure you can afford to pay off in full each month, never miss a payment and never withdraw cash to avoid any fees or interest.
When is borrowing money a good idea?
Borrowing money is sometimes necessary. Without borrowing, most people would never own a house through a mortgage deal. Many business ideas also require a business loan in order to become a reality.
When it comes to personal loans, you should first of all consider whether borrowing money is essential, and how it will be repaid, including the interest. This is particularly important now as interest rates hit their highest level for 14 years. On 2nd February, 2023, the Bank of England raised its interest rate by 0.5 percentage points to 4 per cent. The increase was put in place because the bank said inflation was too high, standing at ten per cent at the time of writing. The idea is the rise will encourage people to save, which helps bring down prices, and then inflation, for a healthy economy. What it also means is that many people will face higher borrowing costs. Loans or mortgages that charge a variable interest rate will be affected. If you have one of these, rather than a fixed deal, the cost of repayments may go up. Finding personal loans with a low APR and low interest rates will likely become more difficult as direct lenders start to update their rates.
If you are considering borrowing money at this time, make sure to take time to understand the interest rate that will be charged in as much detail as possible before you apply. It can be difficult to know what to do, so for this reason we have taken a look in particular at personal loans, and what you need to know before you take the plunge.
Think twice about borrowing money if you’re struggling financially to make ends - particularly high short term credit. Short term loans are useful to cover an unexpected expense and see you through to payday. However, short term loans are not suitable if you’re struggling to make ends meet as most come with high interest rates.
There is a big difference between using a credit card for essentials and religiously making the monthly payments, and taking out a personal loan to buy new clothes, then missing the payments. The first example could actually be beneficial to your financial health, and the second could be very damaging. If you are struggling to make repayments and feel trapped in a cycle of debt, your borrowing may be getting out of hand.
Making a debt management plan
Mounting debts can keep you up at night. Financial stress and mental health problems are intertwined, with research from the Money and Mental Health Policy Institute showing financial stress impacts on recovery rates for common mental health conditions.
If you are in serious debt and need help, seek advice from the many excellent debt charities such as Step Change, which gives free, expert advice. Depending on your circumstances it may also be possible to set up a debt management plan. This is an agreement between you and your creditors to pay all your debts. Usually these can be used when you can only afford to pay a small amount every month, or will be able to make repayments in a few months’ time.
It is possible to make a debt management plan yourself, or to do this through a licensed debt management company. Debt advisors will be able to help you decide whether a debt management plan is the right solution for you. We have put together some information if you find you are struggling financially, which may help you decide what to do.
Three ways to be a super saver
Saving money has never been more popular - or more necessary - than during the current cost-of-living crisis in the UK. Having savings is also crucial to give you a financial safety cushion for emergencies and long-term goals. A commonly-used rule of thumb is to have three months’ essential outgoings available in an instant-access savings account for when life happens. This could prove to be essential should you lose your job or suffer ill health, for example. We’ve written extensively about some of the best ways to save money in the past, but here are three of the top takeaways.
- Do it yourself. This can apply to socialising - such as hosting friends for a dinner rather than going out for the night - or services you usually pay for, such as having the car washed. This approach will cost you more in personal time or effort but can result in big financial savings over time.
- Some credit cards offer rewards and cashback on purchases, so if you change the way you pay for everyday items such as groceries, you could earn perks such as cashback which could make a small contribution to cutting costs, as long as you use this sensibly and ensure to repay in full each month.
- Cancel unnecessary subscriptions. Make a coffee, sit down and go through your bank accounts line by line to find items you are paying for but may no longer use, to make easy savings.
Investing in future you
Once you’ve conducted a financial health check, and taken any action required, it’s time to start looking to the future. This is something you can invest in from a monetary point of view, whether that be finally getting around to researching a pension, saving to go travelling around the world, or investing in property. Being in a position to consider your financial future in this way is a privilege and does take work. But it’s work that will pay off, both with a stable bank balance and a peace of mind which allows for better mental health in the long run. Our comparison calculators are completely free, and never ask for personal information, so you can take control of your financial health, with our help.
If you’ve found this article helpful, follow us on Twitter @compare_must or Instagram @mustcompare and share with your followers.