Five ways to kick start a financial fitness regime

05 January 2021

6 minute read

Starting a financial fitness regime sooner rather than later can help set you up for life.

Who's it for? All Investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • That only when you have budgeted do you know what you can afford to invest.
  • Why it is essential to have a cash cushion in place.
  • How apps can help keep you motivated.

For many of us, the New Year heralds plans to get fit. You may be contemplating a workout or a run for the first time.

So why not apply the same resolve to your investing goals with a long-lasting routine designed to build your wealth?

It’s good to feel you could be that little bit richer not just for a few weeks or a year but far into the future.

By taking one step at a time, you can work on making steady progress with (hopefully) limited pain.

Here are our five tips to developing a financial fitness regime designed to last.

Step 1: Warm up with a plan

What do you want to invest for? Perhaps it’s a deposit on a house, a world trip or retirement – or all three.

Remember you should only start investing if you can afford to – and if you won’t need to withdraw that money in a rush.

Jot down what spare money you have at your disposal – once you have accounted for all your regular bills and dealt with any expensive loans. There’s no point investing when you need money to pay high interest on credit cards and personal loans. You’d need to earn better returns from your investments or savings than you pay in interest – a near impossible task.

Consider trimming back on forgotten items such as unused magazine or streaming subscriptions. Small tweaks can soon make you feel financially fitter.

Step 2: Build a cash cushion

Everyone needs rainy day cash for when the roof starts leaking or you are between jobs or the car needs replacing in a hurry.

This money needs to be in an easy to access savings account. How much you put aside for such emergencies will depend on your individual circumstances but one rule of thumb is to keep several months of salary that can be got at quickly and without penalty. It can be a challenge to make this cash work hard for you in a low interest rate environment. Yet you should always try to track down the best interest rate that you can, as every penny counts. Hopefully you won’t need to dip into this pot but you’ll be glad it’s there if you do.

Step 3: Don’t put it off

While cash is the best home for short term savings and emergency money, if you have more distant goals, then investing is more likely to provide you higher returns. Although this cannot be guaranteed – and you could get back less than you put in – you have the potential to see your money grow by more over the longer term by investing than if you left it in savings. This is because your investments have time to recover from those volatile periods that are characteristic of stock markets.

Investing doesn’t mean you need to operate like a city trader – constantly watching stock markets and buying and selling on a daily basis. Most people tend to start with funds, where your money is pooled with that of other investors and used by fund managers to make the decisions on buying dozens or even hundreds of shares.

The purpose is to spread risk, so that if one or more of the shares does badly the others should hopefully make up for it with better performance. You can choose funds to meet your attitude to risk with options ranging from those that invest in UK stock markets only, to global funds, those focused on a particular sector such as technology or a geographical region.

As with physical exercise it can pay to not put off investing. The sooner you get going the earlier you can start building the money muscle that will hopefully help you reach your financial goals faster.

Time is an important factor in getting your finances fit as the longer you have ahead of you, the more stock market ups and downs you can afford to weather and still hopefully come out on top.

If you don’t want to commit a large sum all at once because you are worried stock markets might fall soon afterwards, you can start small and make regular set payments instead. Regular investing can take some of the strain out of decision making over when the right time might be to put your money into markets. If markets are down when you purchase, you get more for your money. If they are up, you get less. But overall this method helps you smooth out the bumps.

While there can be benefits to investing regularly rather than as a lump sum, you should remember the impact fees have on your investment. If you’re only investing small amounts each month, the minimum monthly fee could make it expensive and may exceed returns.

If you feel confident enough to embark on investing on your own you could look at the hundreds of funds available on the Smart Investor site.

To narrow down the choice, there is the Barclays Funds List. It’s made up of funds our experts like from the sectors they believe are key to building a diversified portfolio. Within each sector, there’s a mix of investment focus and investment approaches to choose from.

If you are short on time, you could consider Ready-made Investments. There are five funds to match different risk profiles. You just choose the one that sounds most like you.

If you don’t know where to start – or whether you should invest at all – always seek independent financial advice.

Step 4: Keep track with an app

Just as a fitness tracker can help motivate you to try that bit harder on a run or increase the number of steps you take on your daily walk, so too can financial apps act as a nudge to keep your efforts at saving and investing moving forwards. There are plenty of them available to help you keep track of your spending and alert you to where you can cut back or even set spending limits. Once you have budgeting under control many apps are designed to make it easier for you to sweep money into accounts that let you save and invest for the future. You can also keep an eye on how your investments are progressing. The Barclays app – available to download if you have a Barclays bank account – lets you take control of your money wherever you are.

Step 5: Develop a healthy tax-free habit

A popular way to start getting into shape with investing is with an Individual Savings Account (ISA). Returns made on ISA investments are tax free – that includes any growth in the value of your investments or any income you might take out in the form of interest or dividends. You can put up to £20,000 a year into an ISA so there’s plenty of scope to build you investments over time. At first the tax savings may not seem impressive, especially as there are annual allowances for savings interest and investment dividends held outside an ISA. The personal savings allowance lets a basic-rate taxpayer earn £1,000 a year in interest with no tax to pay. Higher rate taxpayers have a lower allowance of £500. Top rate taxpayers do not receive an allowance. Everyone can earn £2,000 in dividends this tax year without paying tax.

But as the years go by, particularly if you take out an ISA every year and the value of your investments grow and benefit from compounding – earning returns on returns – the tax benefits can really come into their own. Remember the performance of investments is unpredictable and there is no guarantee that your ISA pot will grow in value. You could lose some or all of your money. If you are unsure about investing, always take professional advice first.

One final benefit of ISAs to mention, that might suit those who don’t like red tape – who does? – there is no need to record ISA investments on your self-assessment tax return – so avoiding scrabbling around to find those elusive interest or dividend payment records.

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