Before you can start to manage your money you need to check where you stand.

In this chapter, four things that really matter:

• ˜ Preparing background information
• ˜ Doing your financial health check
• ˜ Making strategic decisions
• ˜ Analysing your savings needs

Unless you are qualified, you cannot be your own doctor, but with some help you can be your own financial adviser.

Carrying out a financial health check is the first stage in managing your money and is the cornerstone of this book. It is rather like the ‘fact-find’ that a financial adviser carries out on a new client, but is much wider in scope.

A financial adviser will ask you for certain background information. You already know all this but you need to bear it in mind as you do the check.

Having made the check, you can plan the action you need to take in order to get yourself up to par. This may well include the need to save.

Is this you?

• My finances are in a mess and I don’t know what to sort out first.
• I think insurance is a waste of money.
• I’m too young to worry about a pension.
• I wish I could afford a holiday.
• I can save a bit each month but I just put it in the building society.
• How can I make sure my children get all my savings when I die and not the Chancellor?

Preparing background information

Personal profile

A financial adviser will ask you your age, whether you are employed, self-employed, unemployed or retired, whether you are married, have children still dependent on you (or any other dependents, such as a widowed mother without much pension) and what is your highest income tax rate (your marginal rate).

Budgeting

If you do not have a clear idea of your weekly or monthly income and expenditure, prepare a budget. Include in it any savings you are making for a specific event.

Your financial assets and liabilities

List any savings and investments you have, followed by a list of any liabilities, such as bank overdraft or credit card debt. The difference between the two is the value of your net current assets (if it is a negative amount, you need to plan to reduce your debt).*

Doing your financial health check

The ten steps which follow are in order of priority.

• ˜ Reducing borrowing

Are you borrowing money, except against your home? If so, consider paying it off as soon as possible.

• ˜ Establishing a cash reserve

Have you got a cash reserve to fall back on – at least one month’s normal expenditure and preferably two or three, in a deposit account?*

• ˜ Avoiding financial disaster

Is your income protected by insurance against the death, sickness or permanent disability of the breadwinner? Do you have adequate home and car insurance?

• ˜ Retirement planning

Are you paying towards a pension? It is never too early nor too late to start.

• ˜ Getting tax and social security advantages

Are you getting all the income tax allowances, reliefs and credits, and social security benefits you are entitled to?

• ˜ Paying for education

If you have young children, are you saving up to pay for private education and/or university?

• ˜ Saving for special events

Do you need to save up for your next holiday, a new car or a wedding? Putting aside just a small amount regularly is the best way.

• ˜ Reducing your mortgage

It is worth considering a reduction before investing surplus income.

• ˜ Investment planning

Do you have surplus income which can be channelled into a savings scheme or do you have a lump sum to invest?

• ˜ Estate planning

Will your heirs have to pay inheritance tax? If so, consider how to avoid it or pay for it yourself.

Making strategic decisions

The result of your financial health check may cause you to change your budget, for example to pay for more insurance cover.

Or you may wish to change your existing savings and investments to fit in with these guidelines – perhaps to put more into your cash reserve.*

Analysing your savings needs

If you need or wish to save, consider the following:

• ˜ What are you saving for – to increase your cash reserve, for a special event, for your children’s education, for retirement – and how much do you need?
• ˜ How much can you save each week or month and how long will it therefore take to achieve your objective?
• ˜ Do you need quick access to the money, bearing in mind that you might get a higher return if not?

• ˜ Do you pay tax and, if so, what is your marginal rate? Compare returns on an after-tax basis.
• ˜ Can you save regularly? Irregular deposits when you can afford them are better than nothing.*
• ˜ Is your priority income or capital growth? Some investments are better for one, some for the other, but many achieve both.
• ˜ How much risk are you prepared to take? Higher risk should lead to higher returns, but only in the longer term.

Summary points

• * A financial health check is the first and most important step towards managing your money.
• * Start from where you are now by preparing budgets and listing any existing savings and investments.
• * How does your present position compare with the ideal and how can you bridge the gap.

• * If you are saving, you need to decide what you are saving for, so that you invest appropriately.