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10 questions you must face about your finances

Joanna Robinson 20th Feb 2020 2 Comments

Reading Time: 8 minutes

Are you really on top of your finances? You might be getting to the end of each month without facing a budgeting disaster or creating money nightmare, but this is not quite the same thing as mastering your money.

To make the most of your finances, you need to go further, and ask yourself 10 key questions.

  1. Do you have a plan?
  2. What’s your net value?
  3. How much do your debts really cost?
  4. Are you prepared for the unexpected?
  5. Have you calculated your monthly income and spending?
  6. Are you protected from fraud?
  7. Do you know how inflation affects your savings?
  8. Are you putting enough aside for your future?
  9. Are you spreading your investments?
  10. Do you know how to minimise your tax bill?


1. Do you have a plan?

Sit back, close your eyes and think: what do you want to do with your life in the next year, five years, 20 years? Write down a list of ambitions – then make a note of when you want to achieve each goal by.

Next you need to consider how much money you need to set aside in order to achieve each of your ambitions. This will give you an idea of your savings goals and the time you have in order to reach them.

This process might feel a little overwhelming, especially if you have major goals and only a little time in which to achieve them. However, by writing them down, it will give you a chance to understand the challenges you face, prioritise your savings, consider whether you need to adapt your ambitions to suit your finances, or find new ways to achieve them.


2. What’s your net worth?

Your net worth is how much money you are left with when you take away your debts and borrowing from the value of everything you own.

For instance, you might have a house worth £250,000, a car worth £10,000, a pension worth £20,000 and savings amounting to £5,000. This gives you assets of £285,000. However, you then need to subtract your mortgage of £200,000, car loan of £8,500 and credit card debts of £3,000 – leaving you with £73,500.

It feels like a needlessly depressing process, but it’s essential to be clear on where you stand. That way, instead of saying something trite like “My home is my pension”, you can come up with something more meaningful and useful like “I only have assets of £53,000 and I’ll need savings of £100,000 for a comfortable retirement, so I need to prioritise long-term investments.”


3. how much do your debts really cost?

Be honest with yourself about the interest you’re paying on your credit card, car finance, loan or mortgage. It may be upsetting to see how much it’s costing you, but it will give you all the motivation you need to make the effort to deal with your debts.

If you’re in a position to pay them off, then do so. If that’s not a realistic prospect, you can switch to products charging lower interest rates. For credit card debts, look into getting a 0% balance transfer credit card that you can load all your existing debt onto and pay it off before the interest-free period expires.

If you know you won’t pay it off in time, it may be better to go for a low lifetime balance transfer card. This will reduce your monthly interest payments, without establishing a deadline with a harsh penalty for failure.

You may also be able to get a better deal on your mortgage. See if you can save with our comparison service here.

Of course, the golden rule is that once you have switched, you should use the money you’ve saved on repayments to pay off your debts faster, so you get a double whammy of savings.


4. Are you prepared for the unexpected?

It’s extremely important to have a back-up plan for anything that may occur unexpectedly, like redundancy or the death of a spouse. If you suddenly lost your income, how long could you last on your savings? It’s a nasty thought, but we all need a safety net.

Once you have paid off your debts, the next essential step is to set up a savings safety net – a lump of money that you accumulate in a savings account (ideally instant access) so you can dip into it if an emergency occurs. It’s tempting to try and save money at the same time as paying off your debts – but interest rates on savings are so ridiculously low, and rates on credit cards etc so very high, that it’s not worth it. You’re not doing yourself any favours putting money into an account with 1% interest – while you’re spiralling at 29% on credit card debt!

When you can save, ideally, you need to set aside the equivalent of six months’ worth of income, but failing that three months at the very least. Work out how much you can afford to set aside, get it in an account and do not touch it except in an emergency.

If you have a family, another safety net you’ll need is life insurance. Think about how your family would cope without a breadwinner. A good life insurance policy is not necessarily the cheapest, but the best one to suit your needs. We’ll help you make an informed decision with our guide here.


5. have you calculated your monthly income and spending?

Keeping on top of your finances starts with understanding how much cash you have coming in and how much you spend each month. Recent bank statements can be very useful when you’re trying to remember what you spend. You might even find things that you don’t know you’re paying for, or that you don’t need to be paying for.

Armed with a statement, you can easily set yourself an effective budget. To further streamline your financial management, consider following a month-end close process.

Once you have a monthly budget, you can find simple ways of reducing your monthly spend.

If you can get a cheaper deal on your utility bills elsewhere, then switch them! There is absolutely no point in paying for things you don’t use, so take the time to research and find a better option.

You could consider changing:

You could save up to £659 a year by changing your gas and electricity suppliers, you could make £175 just by switching your bank account! You can also save £100s by getting cheaper broadband and phone packages.


6. Are you protected from fraud?

Fraud is on the rise, particularly through the internet, and everyone has to be on their guard. You can’t be expected to know every one of the latest scams but you can do some things regularly to protect yourself from most attacks:your finances - fraud

  1. Check your bank account and credit card bills. Make sure you check your bank account, ideally at least once a week. Go through the whole list of transactions on your credit card bill and question any that you don’t recognise. The quicker you find the problem, the sooner you can be reimbursed.
  2. Check your credit file to make sure no one has stolen your identity. Sign up for free to CreditExpert so that you can see what has been written about you and correct any mistakes or fraudulent claims. If you’ve been the victim of identity theft already, you may want to pay the monthly fee, so that you can keep an eye on your record at all times.
  3. Never click on links that are sent to you by email or through Facebook, Twitter or other social networking sites. This goes for emails that are apparently from friends, as well as those from banks and other organisations.
  4. Remember – if it sounds too good to be true, it probably is. There are several scams masquerading as proper businesses offering to cancel your debts or help you make money in your spare time. Check with MoneyMagpie first before you sign up to anything.


7. Do you know how inflation affects your savings?

Inflation can seriously eat into the value of your savings and investments. It doesn’t seem so important when it is running at historic lows, but go back to 1974 and it was 16% – which was a game changer. Even rates as low as 3% can damage your savings.

Say you have £100 in a savings account that pays 2% interest. That would mean your £100 would grow to £102 (not taking into account any applicable taxes) over the year. However, as soon as inflation rises above 2%, your savings are being eroded, and you would actually be losing money in real terms after inflation.

If inflation rose to just 3%, your money would be worth less than when you started: your £103 would only get you £99.03 worth of goods.

So if you leave your money in a savings account that doesn’t match inflation, you’ll lose out. If you want a real return on your money, consider investing in the stock market. We’ll show you a simple low-cost way to do it – with index-tracking funds.

You can even avoid the banks all together and use a social lending site like Zopa instead – they offer returns of about 5–8% – far better than any savings account.

It’s worth pointing out, of course, that both options are very different from a savings account, with different risks and potential rewards, so you need to understand exactly what you are getting into.

If you would rather stick with a good old-fashioned savings account, at least get the best rate on offer.


8. Are you putting enough aside for your future?

Are you saving enough for your future?If you’re relying on receiving a state pension to get you through your retirement – don’t! It works out at roughly £8,000 a year which isn’t enough to enjoy a comfortable retirement on.

If you are offered a company pension, go for it. It can often mean free contributions from your employer, so grab it with both hands.

If you’re self-employed, or you don’t get a pension from your company, look into setting up a cheap, easy stakeholder pension. Or, if you’re feeling more adventurous, set up a Self Invested Personal Pension (SIPP).

The big advantage of pensions is the tax benefit – the fact that the government puts in the tax you would have paid on any money you contribute.

More ways to save

However, pensions aren’t the only way to save for your future, and you certainly shouldn’t solely rely on them. There are also shares (wrapped in ISAs to avoid tax), corporate bonds and property for a start. Find out about more easy ways to supplement your pension here.

You could also look at saving into a Lifetime ISA – especially if you’ve yet to buy your first house or you’re self-employed. You can save up to £4,000 a year between the ages of 18-50. The Government tops up your savings with a 25% bonus – and you can use the funds either for your first home deposit or as a nice tax-free lump sum when you’re 60.

The important thing, though, is that you put enough away each month to build up a nice pot of money to keep you going. As a general rule of thumb, to work out how much of your wage you should be saving to put towards your retirement, you should halve your age and use this as a percentage.

So if you’re 25, 12.5% of your salary should be saved or put into investments. Whereas if you’re 50, you should save 25% of your salary – obviously catering for the reduced amount of time you have left to save before reaching retirement age.


9. Are you spreading your investments?

When it comes to investing for your future, spread your money across two or more different asset classes.

By asset class, we mean property, pensions, shares, bonds etc. With investments, it’s never a good idea to rely on one type to bring you a return.

Spreading your investments around means there’s a chance that if one asset class is performing poorly, another will do well and help offset your losses.

Just make sure that you keep an eye on your investments and top them up where you can.


10. Do you know how to minimise your tax bill?

As a nation we waste a staggering £10 billion a year by paying tax we could avoid. Now, there is a big difference between evading tax and avoiding it.

Tax evasion is illegal – you’re trying to wriggle out of paying tax you actually owe. Avoidance isn’t illegal. It simply means moving your money into places and products to be more tax efficient.

If you think you need to cut the amount of tax you pay, you’ll find all the information you need here.


Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.

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Bobb gee
Bobb gee
12 years ago

A very good piece but how will a £400000 pot convert into 23000pa?

Cathy Bruce
Cathy Bruce
13 years ago

Please I need some advice on my finances, it is a strange case.
Advice would be most appreciated as i am trying hard but it is not working.
Thank you,
Cathy Bruce.

Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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