Are you a spender or a saver?

Are you a spender or a saver? Do you max out your credit card at every opportunity or squirrel as much away for the future as possible?

Of course, there’s no need to sit at either extreme – it is possible to be a spender AND a saver. All it takes is some juggling.

Here, we take a look at getting to grips with your finances to help you spend and save without running into monetary problems.

Pay off your debts

Your first task is carrying out an MOT on your finances. Start with any debts. How much do you owe and what interest rate are you being charged?

It’s pointless saving in an account paying 4% when you’re being charged 20% by your credit card company.

There are ways to potentially reduce such repayments – such as consolidating your loans – so it’s always worth exploring your options. The key is establishing exactly what you need to pay each month to clear these debts.

Consider your income

Step two is looking at how much money you are bringing home. Is this a set figure or one that fluctuates every month? Compare this with your expenses. How much are your monthly bills?

Every organisation needs a balance sheet, and your household is no different. The ideal scenario is spending less than you earn. If you’re spending more than your income, then it’s time to re-examine your outgoings.

Setting a budget

There are various schools of thought when it comes to how much you should be saving and what can be spent on enjoying your life. My very first boss said it should be a third on necessities (mortgage/food/bills), a third on having fun and a third saving for my future.

Another is known as the 50-30-20 rule. This suggests that 50% of your income should go on essentials, 30% on non-essentials, and 20% into savings.

Everyone’s needs are different, of course, but if you can look to save at least 10-20% of your monthly salary then this should help you strike a decent balance. To do this, split your monthly costs into essentials – such as mortgage repayments – and non-essentials, which will include socialising and buying new clothes.

Your goal is to have a set amount of disposable income out of your salary, once all the essential living costs have been paid. This is where the ‘financial fun’ starts.

How to spend

I probably don’t need to explain to you how to spend your money! Most of us have a detailed shopping list in our heads in case we ever scoop the National Lottery.

However, being a canny shopper is an art form. Always do your research – especially ahead of buying big ticket items such as televisions – and don’t be afraid to bargain with retailers.

Take advantage of promotions and loyalty cards for your favourite items. Shops are desperate for custom so will regularly offer discounts.

How to save

In contrast to spending, most of us do need a few tips on how to save. Putting money away is essential. No-one knows what the future holds so it’s wise to have enough tucked away to cover different eventualities.

This is where you need to establish your financial goals. Each person’s circumstances are different, of course, so these pointers are very general in nature.

You need to decide what you want from your life – both in the next couple of years and in the decades to come – and be clear on your priorities. For example, are you laser-focused on buying that holiday home in Spain? Or are you looking for an extra income stream to help cover the bills?

Short-term savings

The first requirement is an easy access emergency fund with which you can help tackle those crises that arrive when you least expect them. It might not be possible immediately, but ideally you should have at least three months of salary in a savings pot, regardless of your age.

This money can be held in a straightforward bank savings account, but a cash individual savings account may be a better longer-term option. By putting your money in the latter, you’ll be using up some of your annual ISA allocation – and benefitting from earning interest completely free of tax.

Longer-term savings

Then there are your longer-term savings and investments. Think about what you want from your life and how much your money needs to grow for your dreams to be realised.

Are you looking to build up a nest egg for your retirement? Would you like to give up work within 10 years so need to have money behind you? What are your investment goals?

A golden rule is the higher the return you want to achieve, the more risk you’ll have to accept. This means accepting the possibility of losing some – or all – of your original investment.

Striking the right balance

If you’re in your twenties, then you can probably afford to invest more into supposedly riskier assets as your money has more chance of recovering from volatile periods.

However, if you’re in your 60s and edging towards retirement, you may prefer to have the bulk of your assets in safer assets, such as bonds.

Whatever your circumstances, diversification is worth considering. This means having a broad spread of uncorrelated assets in your portfolio to give you some degree of protection.

Investment approaches

While you can invest in individual company shares – known as equities – a better option may be an investment fund run by a professional manager.

These individuals pool money from you and many other investors, which they use to buy into a wide variety of assets from around the world. This gives you exposure to a broader asset allocation mix. There are plenty of funds, depending on which markets, asset classes or sectors you want the most exposure.

Core and satellite

Some investors favour the so-called core-satellite approach. This sees them having a solid, dependable fund at the core of their portfolio. They will then add ‘satellite’ holdings in the form of lower amounts invested in riskier assets, such as an emerging markets fund that’s likely to be volatile.

In addition, many investors choose to drip feed money into the markets to benefit from pound cost averaging. They pay a set sum each month to buy fund units at whatever price they are available. This takes the guesswork out of trying to time the market, which is always best avoided.

Individual Savings Accounts

Remember, you can currently save £20,000 every tax year into individual savings accounts that enable your investments to grow free of income and capital gains tax.

A stocks and shares ISA, for example, is a tax wrapper that enables you to invest in shares of companies, unit trusts and investment funds, corporate bonds, and government bonds.

Even if you’re unsure what type of investment fund best meets your needs, making the most of your annual allocation will secure you tax-free flexibility in the years to come.

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