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Savings and lifestyle Financial planning
26 June 2023
Author: Punter Southall Aspire

The fundamentals of financial wellbeing: a short guide

Do you feel secure and in control of your finances, both now and in the future? According to the Money and Pensions Service, this describes a state of “financial wellbeing”.  

Having financial wellbeing is a good place to exist - not just for your finances, but also for your mental health. Yet how do you achieve financial wellbeing? How do you continue to maintain it, especially during a “cost of living crisis” like we are experiencing in 2023? 

Below, we offer some answers to these key questions.  

The importance of goals to financial wellbeing

There is no single definition of what comprises the “core” of financial wellbeing. Some, for instance, argue that it has four key elements - spend, save, borrow and plan. Yet we believe it is important to start even further back, by establishing your goals. 

According to psychologists, having goals helps humans to create a vision of what they want their lives to be. It gives us a sense of moving through life with a purpose, not simply existing in the conditions we find ourselves in. 

Having goals is highly motivating, encouraging and empowering. For instance, if you have a low fitness level then you could choose to do nothing about it. This often leads to a sense of defeat. Yet having a health goal, and a plan to achieve it, can significantly boost your mental health. 

The same applies to your finances. In 2023, many people are struggling with their household budgets as rising inflation (and another 0.5% interest rate rise) erodes their spending power. The situation is causing a lot of anxiety. How bad will things get? How will I cope? 

The good news is you can still have financial goals even during difficult economic times. Maybe it is as simple as putting aside £50 a month into your emergency savings over the next 12 months. Having at least one goal will strengthen your resilience and focus your attention. 

Try not just to look at the short term, however. Also, consider your long-term financial goals. What do you want retirement to look like? How can you progress towards this vision - e.g. using your pension, ISAs and other financial resources?  

The benefits of a back-up plan

Prime Minister Harold Macmillan was once asked what the greatest challenge was for a statesman and replied: “Events, dear boy, events.” Disasters can derail governments from their policy goals. They can also undermine your financial goals and wealth. 

It is difficult to plan for disasters. No one can predict the future. However, you can put measures in place to prepare for the unexpected. What could happen that might stop you from achieving your financial goals - or, even set you back? 

This is called having a financial protection plan. It is hugely important for instilling a greater sense of financial wellbeing. After all, a lot of anxiety comes from the big “what if?” questions in life (e.g. “What if I lose my job?”). Having some ready-made answers helps with peace of mind. 

Right now, for instance, traders are predicting that the UK base rate could rise as high as  to 6% by the end of the year (it has just risen to 5%). It could then remain at 6%this level until May next year. A lot of homeowners are, understandably, worried about that. Yet could it help to have a plan ready, in case this scenario transpires? 

For example, perhaps you could visit your bank (or their website) and ask how much your monthly payments might rise if the base rate rises by 6%to around 6% (if you are on a variable mortgage).  

If your mortgage would rise by, say, £200 would there still be a healthy “gap” between your income and expenses? If not, could you cut costs elsewhere to keep making your payments? If the answer is no, then perhaps you need to seek professional advice about locking into a fixed-rate deal now. Or, in the more drastic scenario, perhaps downsizing is necessary. 

Financial protection also encompasses having the right insurance policy (or policies) ready to support your household in a disaster. If you suddenly cannot work due to a serious injury or illness, what would happen? Perhaps income protection or critical illness cover could help buttress your finances until you get back on your feet?

Why financial education matters

Imagine you set sail for the first time on the open sea. It would likely be very nerve-wracking if detrimental conditions arose which made you feel out of control (e.g. a huge storm).  

Yet you would probably be even more anxious if you did not understand the vessel, some possible reasons for the poor conditions and what it might take to make safe harbour.

In other words, education is crucial to fostering wellbeing. With your finances, it is not necessary to become an expert on investing, taxes or other aspects of financial planning. Yet it helps to have a solid understanding of foundational concepts.  

For instance, why is a pension generally considered a better “vehicle” for building a retirement fund compared to a cash savings account? You do not need to be an expert on pensions. However, knowing their benefits (e.g. you get tax relief on your contributions) can help you make more prudent decisions.  

Financial education can also help you to protect yourself from scammers - or, common mistakes that people make with their money. To take the example of pensions again, in 2023-24 (the current tax year) you cannot take pension benefits before age 55. So, if someone approaches you claiming they can help you take benefits before age 55, you know that this is a big red flag. 

Financial wellbeing is vital to help people feel less stressed about money, boosting confidence and creating a greater sense of security in life. Please speak to us if you want to explore this topic more, in your own case, with a professional at Punter Southall Aspire. 

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