Many of us are able to manage our day-to-day finances. But, to achieve financial sustainability, we need to actively manage our finances in the short, medium and longer term.
Day to day, we need to have enough money to cover all our essential expenses to get through the month. Ideally, we should put aside money to create a ‘buffer’ for unexpected emergencies. In the short term, we may need to plan for holidays, annual celebrations (such as birthdays and Christmas), and other expenses, such as car maintenance. In the medium term we need to plan for life events, such as starting a family, buying a house or moving home. And, as we get older, it’s important to start planning for long-term financial needs, such as retirement. By taking steps now, we can move towards a more sustainable financial future.
Clearly, we all need to have a good idea about how much money we're spending and what it’s being spent on. Having a budget can help you to manage your spending. For longer-term sustainability, we can start to plan for future life events or goals through savings and other contingencies. Ideally, we should only borrow when we absolutely need to and what we can afford to pay back, while still having adequate emergency funds.
Keeping an eye on your pension forecast regularly helps you to plan for retirement. If you can afford to increase your pension contributions, this could make a difference to long-term financial sustainability.
How to budget
Budgeting for the medium and long term is very different from short-term budgeting. For the short term, keeping a detailed, accurate budget can help you to meet day-to-day costs and plan for annual expenses. For the medium term, you can use more general figures and timescales.
Long-term planning can be based on goals and aspirations. This includes understanding the difference between ‘required’ and ‘desired’ income and how you will achieve these goals. You may need to factor in mortgage payments if the mortgage term goes beyond your expected retirement age.
Be sure to insure
From time to time, we all face unexpected expenses, such as vet fees, household repair costs, and possibly a change of financial circumstances arising from the loss of a job or the death of a partner. Having adequate insurance in place can help to lessen the financial impact and stress of these events.
We insure our cars, not just because it’s the law but because few of us could afford to pay for repairs, replacement or personal injury compensation. In the same way we should consider insuring other aspects of our lives if the costs are reasonable.
Janebot, our virtual money adviser, can help you navigate our financial management tools. With these tools, you can get useful tips on budgeting and managing your money, savings and investments, planning, retirement and debt advice.
Don’t put off until tomorrow what you can do today, especially where financial planning is concerned. Set time aside to regularly review your finances and plan ahead. This will help you to manage your short-term expenditure and sustain your finances going forward. Review your bank statements monthly to help you stay on budget and identify issues early so you can take appropriate action.
Biannual reviews can help identify areas of high expenditure or unused subscriptions so you can make changes if needed. Each year, you should also check your contracts and deals that are coming to an end, such as utilities, mobile phone contracts, broadband and insurance arrangements. This will ensure you are getting the best deals.
In the longer term, checking your pension provision, including projected income and any lump-sum payments, can help keep your retirement planning on track. Most workplace pension providers can give you annual statements, or you may be able to log in to your account online. You can find details about your state pension and entitlement at: www.gov.uk/state-pension.
If you are over 55, you can draw down on any pension lump sums. But you should consider the tax implications as only 25% is tax free; the rest is taxed as income. If you’re a homeowner, you might need to plan your finances to tie in with the end of your mortgage term. You might also need to factor property maintenance costs into your retirement income.
It’s important to build flexibility into your medium- and long-term planning. This year, more than any other year, has shown that our financial circumstances can change at any time. Our goals and aspirations can also change. You may have been on track towards a savings goal when an unexpected expense depletes your savings. In such a situation, it’s important to revise your budget and adjust accordingly.
Actively managing your finances, regularly planning and reviewing your spending and savings, can help you keep control of your finances, relieve stress and increase your chances of achieving your goals.
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If you're struggling with debt or you'd like advice on budgeting, contact us now. Our Money Advice and Guidance Service team can help you get your finances back on track.