Earlier this week I gave a talk to the PwC Muslim Network about personal finance. There were a few things in there which I wanted to write about separately in a bit more detail. They form the basis of some of the most overlooked secrets of wealth-building that I can think of and I wanted to share that with you all.
I’d love it if you commented with your thoughts on all of this, especially if you’ve had success with any of the steps below or if you are now going to implement something off the back of this article.
1. Your salary
I don’t think people appreciate this as much as they should. Job-hopping can bring you serious gains.
Now look, there are a whole host of reasons not to job hop. It doesn’t look ideal on your CV and there is an awful lot to be said for sticking in an environment which you are developing well and which you enjoy. Those are perfectly good reasons to stay with your employer.
But if all other things are equal and you can gain 20%+ of your salary by moving companies, it can have a serious effect. Particularly if you multiply that effect by 2 or 3 times in the space of 5 years or so.
If you’re earning £30,000 somewhere and you move two times for a 20% increase each time, you’ll be on a smidge under £45,000. It’s highly unlikely that you’d get a 50% salary increase at your original place in that time.
Some industries lend themselves to much bigger increases as well without even changing your job role or seniority. Questions you can ask yourself are:
- Are there companies in the same industry that will pay a higher salary for my role?
- Do I have enough experience to apply for a more senior position either at my company or a different one?
- Am I in a position to negotiate a raise at my current employer for my current role?
Sometimes though, loyalty can pay. You might be somewhere where you are going to get fast-tracked or you know for a fact that the powers-that-be know you and rate you and will compensate you fairly. Just make sure they keep their end of the bargain in reviewing your salary regularly. You should know your worth in the wider market as part of those discussions too.
2. Proper budgeting
Budget is a scary word because it has a connotation of control and restriction. But budgeting done well is actually liberating.
What does budgeting mean? For me it means getting a proper handle on your incomings and outgoings. You should basically see your personal finances like a business does. Really careful scrutiny on the ins and outs and a close eye on cashflow.
Thanks to the wonder that is Open Banking (the infrastructure behind letting apps connect safely with your bank feed), there are plenty of budgeting apps. I’ve recommended Money Dashboard, Emma and Yolt before but you can try out any. Also check out YNAB and FreeAgent. Both are paid but very useful because you can create your own categories and I think they go a step further. FreeAgent is actually designed for freelancers but I use it for personal finances and I like it as it gives me the customisability that I need.
The idea with these is that you get your bank transactions line by line and you have to categorise them. Over time, that builds up really good data for you to visualise. You’ll know for example that you spent an average of £342.61 per month on average on grocery shopping over the last 6 months. Or that you spent on average £78.94 per month for the last 3 months on coffees and other unnecessary food purchases.
That is data you can act on. You might cut back the coffees and put the slack elsewhere in your budget.
3. Savvy fixed spending
The great thing about getting step 2 right is that it will really show you exactly what all you spending looks like. One bit of data you will glean from it is your fixed costs.
Like businesses have fixed costs (things like rent, salaries, etc), we individuals have fixed costs too. Your phone bill, gas, electricity, and council tax are all examples of fixed costs.
Given that we have to spend on these things, it makes sense to try and drive the costs down. Some things you won’t be able to bring down – try as you might with your local council, I suspect they won’t budge on your council tax payments!
But when it comes to your energy provider, your mobile phone provider and your broadband provider you will definitely be quids in if you regularly shop around.
Some quick wins here:
- For energy, I personally use MSE’s cheap energy club. Other companies charge for this but MSE doesn’t. It’s basically a tool that will update you when it’s cheaper for you to switch energy providers. It will also factor in your exit charges from your existing provider too.
- For broadband, use any comparison tool to check what you could be getting. Just be sure to compare like for like. No point going for an 11mb broadband which is £5 cheaper if you are getting 76mb fibre right now. But if you can get 76mb fibre cheaper than you are getting right now, it makes sense to switch if the new provider is reputable too. Be sure to check that you’re not in contract with your current provider otherwise you’ll face exit charges.
- For mobile phones, I always go for a sim-only approach. I find that contracts with phones just mean you end up buying a fancier phone than you need and you get tied in. Instead, I purchase my phones sim-free and then buy a sim-only plan. Unlike me, I’ve recently fallen foul of my own advice and ended up carrying on with my old contract despite the minimum term running out. So I was paying way more than I should have been. I’ve finally got round to switching. I opted for Smarty – Three’s no-frills network which offers 30gb data for £10p/m and you can leave any time. No comments yet as I’ve not had a chance to test them out!
A full analysis of all your fixed spending should bring out the key question of where you can negotiate lower rates with existing providers or switch altogether.
This might only seem like a few quid here and there, but over a few things and across a number of months and years, it can add up to a good amount of money.
4. Careful luxury spending
Another thing step 2 should flush out is how much spending you’re doing on luxuries (a.k.a things you don’t need).
Be honest with yourself about what things are luxuries and what things are necessities. Once you have enough data, start asking yourself some serious questions.
Are you comfortable with how much you spend monthly on a whim? I’m not advocating for zero luxury spending. I’m saying you should have a controlled element of luxury spending within a controlled overall budget.
A few cool tips here:
- If you’re about to spend on a luxury item, physically take out that cash and buy it physically (rather than transacting online) if you can. There’s something about the tangible nature of cash and the act of going into a store which will test how much you actually want this thing.
- For luxury spends, ask yourself firstly “Will I use it?” and then ask yourself “Is it worth it?”. If the answer to either of those is no, then it’s not really sensible spending and you should refrain. This is a really useful matrix to frame decisions and credit goes to the excellent Martin Lewis for it.
- Wait for a month. Luxury spends are rarely something you need right now (no matter what you tell yourself). So wait a little while and if you are still rationally going to buy it in a month, then it’s probably a good indicator that it’s a sensible purchase, even though it’s a luxury buy.
Again, this might seem like a few quid here and there, but it can add up to a lot.
5. Pension savings
Opting out of workplace pensions is one of the most damaging things you can do.
The reason? Employers are legally obliged to contribute to your pension and in many cases, they’ll go above the legal minimum. This is free cash you’re turning your nose up at if you are opting out of your workplace pension.
It’s also just good practice to get into the habit of siphoning off money to invest long-term. When you put your money into your workplace pension, it gets invested and you enjoy the benefits of years of investment.
Of course, this means that you should make sure that your pension money is being invested somewhere halal. We wrote more on this topic here.
6. Regular savings
One thing I have come to realise over the years is that our elders had it right when it came to one thing: regularly saving money.
I’m not sure about you, but my parents would talk about this often when I was growing up. I always thought it unimportant because as long as you are disciplined in your spending, it shouldn’t matter if you have a few extra digits in your bank balance.
But having spoken to many peers on this and also from my own experience, there is something in the regularity and consistency of funnelling money away from your main bank account into some sort of savings that means you accumulate more than you would if you had just left it in your own bank account.
My tip here is to literally set up a direct debit the day after payday so you never really feel like the money is yours. My second tip would be to then invest this money into an equities fund. Don’t worry about timing the market, just regularly tuck money away for a number of years and don’t worry about it. You’ll probably surprise yourself at how much you can accumulate this way.
£250 a month for 10 years with a projected 7% annual return (about average for the stock market) will get you £43k. Your deposits alone will have been £30k.
My top tip here is to set up a direct debit either into a different savings bank account or into a stocks and shares ISA where you then have a regular investment set up monthly. Check out our investment comparison engine to browse some potential options.
I’ve given you what I think are six simple wins to help climb that financial ladder. Simple doesn’t mean easy though and this stuff requires good discipline. But if you have felt for a while like you really need to get a grasp on your finances, that’s probably an indicator that you need to act!