This guide begins with the vital skill of preparing for big-ticket spending items that often come when they're least expected.
Knowing your regular spending and income habits is a great achievement. But adult life doesn't usually consist of smooth, regular spending commitments. Patterns are much more lumpy.
Think about what could happen over the next six to 18 months, or longer. You might want a foreign holiday, or a bike, or moped. You may have to get clothes for an interview, attend a close friend’s wedding or pay for driving lessons. Those are one-off or, at least, irregular costs.
You may also have regular bills that turn up predictably—insurance for the moped, a season ticket for your sports team, and presents and celebrations around a holiday festival. Then there are unpredictable costs—a laptop breakdown, or a sudden opportunity to travel.
You can't pay for these out of regular monthly income. You need to know the secret ingredient of advanced money management—which is time.
In advanced money management, time is your great friend. It does the heavy lifting. A sum like £10 does not go far towards major bills or purchases. But £10 a week becomes £520 after a year, which is definitely useful. Options for using time to help you meet big payments are:
- pay for it at the end of the time period—saving, which means you can’t have it right now
- pay for it at the beginning of the time period—borrowing, which costs money
- pay for it in small batches during the time period—such as monthly rather than annual insurance payments, if available, which is also likely to cost money
Exceptional items come along so often they are not really exceptional. Good money managers recognise this early, and start to build it in to their spending habits.
The key to planning ahead is to start putting a percentage of your money aside, even though you don't yet know what it will be spent on. The work you did on budgeting and tracking your finances will let you calculate what is a realistic amount for you now. Start small, and increase the sums when you can.
Choosing financial products
Yes, just like any other industry – consumer electronics, sports and leisure – the financial industry has products. They are sometimes called financial services, but they mean the same thing.
If you buy a washing machine, you may be asked, “do you want finance?” or “do you want credit?” They are asking if you want a loan, and to pay for the washing machine in monthly instalments. This loan will cost money—interest.
They may also ask if you want to take out an extended warranty. The loan and the warranty are both financial products. Many companies are just as much in the business of selling financial products as they are in selling the goods that the shop displays.
On the other hand, there are financial products that will pay you interest, such as savings accounts.
Common financial products
You may already have some of the following. Others will be ones you might be considering in coming years.
- current bank account
- savings account
- credit card
- store card
- student loan
- car loan
- extended warranty
In just the same way that you would shop around for a phone, or for your supplier of gas or electricity, you can shop around for the best deal for these financial products. This is important because their price, the interest they charge, can vary enormously.
The choice can be dizzying, but there is a lot of help on hand. Good starting places are price comparison websites, trusted sites like the government’s Money Advice Service and the money pages of newspapers, many of them online. You may also know people with experience of these products who can answer questions. Seek them out.
Talk about money
One of the common complaints is that we don’t talk about money enough. People say it is a taboo subject, even more so than sex. Try breaking that taboo. Ask people how they paid for something.
Some will not want to divulge the innermost secrets of their financial lives (so talk about their sex lives instead.) But many will be happy to share the reasons behind their decisions.
All the time you’ll be building up your knowledge of financial products and services and learning how to select what is right for you.
Accept that mistakes are inevitable
Keep focused, and you’ll grow more confident about money management. Don’t tell yourself, or let anyone else tell you, that you’re 'hopeless with money', even after you make mistakes.
A skilful sports player will miss easy chances, or fluff a shot. It doesn't mean they're useless. Likewise, if you make financial decisions that you later regret, accept it as the way things are and move on.
As you’re reading this website, you’ve already taken an important step towards gaining the lifelong skills you need to handle your finances.