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Hi Heather,
My name’s Edna. I was wondering if you could talk about what net worth is? Why it matters and how I can improve my net worth? Thanks. 
Thanks for this question Edna.
The net worth of a person is the value of what they own (these are their assets) minus the value of what they owe others (these are their liabilities). Now, most people don’t sit around calculating their net worth for the simple reason that most people don’t tend to think about their money situation but the calculation is very simple. I recommend you use a spread sheet when you do your calculation but you can also use a pen and paper. The only problem with pen and paper is that all the addition and subtraction is more tedious. Starting with the asset side, list down:
Personally, I don’t include things that fall in value like cars and computers but you can add them to the list as well especially if you own very expensive equipment that holds its value even when sold as second hand. I also don’t include personal possessions like books and clothing because I see them as being very transient and I would suggest you don’t bother with those type of thing either. Once you have listed everything that you own, find out what its value is and sum it up, this is your TOTAL ASSET VALUE. Then moving on to the liabilities side, list down: Your home mortgage Each of your buy-to-let mortgages All personal loans – from banks or stores All credit cards and store cards Money that you owe to friends and family Once you have listed everything that you owe, find out what the balance owed is and sum up all your liabilities, this is your TOTAL LIABILITY VALUE. To get your net worth subtract your total liability value from your total asset value, and voila! You have your net worth. For some people this value will be positive, for others it will be negative because the value of their debts exceeds the value of their assets. A negative value doesn’t mean you’ve been bad with money, it could just mean you’re young, have student debt and haven’t had a chance to build wealth, assets and earnings to pay off the student debt. A negative value also doesn’t mean you’re suffering. In fact, a zero net worth could be worse than a negative net worth. Lots of people in developing countries have no assets and no debts but they may be living a very difficult life without basics like enough food. In developed countries, access to cheap credit means people can live an amazing and lavish life although in reality this is sustained by debt. As long as the person earns enough to pay their interest every month this can go on for very long periods of time. And, the reality is, some people aren’t scared of debt, it doesn’t stress them out at all; what would stress then out is if they lost their job, or worse, reached retirement in this dire financial situation and found themselves pursued by people they owed money and possibly made homeless. 
Why can knowing your net worth be valuable to you?
Because you can now track it, set a goal for it and improve it. If you have a negative net worth then you might want to aggressively tackle paying debts off. As you get rid of debts you’d also be getting rid of interest payments and would therefore have more disposable income to save and invest. Personally, I didn’t start intentionally tracking my net worth until I was 35 but I have always avoided debt, saved and invested from the very first year I worked so it wasn’t a trigger for me to be sensible but it definitely drove me to do better. Something weird really happens when you know your net worth, you become motivated to improve it and it makes it slightly easier to avoid excessive spending. How often should you track your net worth? I’d say once or twice a year is enough. Personally I refresh my asset and liability values on 30 September and 31 March – 31 March is ideal because it’s the end of the tax year and as I wanted equally spaced values, the second date became 30 September by default. When I track my net worth, I don’t regularly change the value of properties because it can distort the net worth calculation by inflating supposed increases in property value. If you plan on selling a property then you might be interested in updating the value but other than that, I’d just leave it. I also don’t update the value of defined benefit plans (aka final salary scheme or workplace pensions) because their value paper value can bear no relation to your ability to spend them. What is better is to get a general idea of what your fixed pension payment is likely to be based on the number of years you plan to stay in the job and keep this in mind as cash flow that you can expect at retirement. Also, ignore the state pension. You have no idea what the format of state pension will be when you get to retirement age unless you’re retiring in the next 10 or so years. I’d also just keep the number in mind. What does improving your net worth involve? To improve your net worth you either need to increase the value of assets or reduce the value of liabilities. Every time you reduce or clear a debt, you improve your net worth. Even if you aren’t saving but are focused on clearing personal loans and credit cards, you are improving your net worth. If you aren’t saving, or paying off debts but you own your own home and have a repayment mortgage on it, the act of paying your mortgage off means you are increasing your net worth. What’s your goal? Is it just to increase your net worth ? Or do you have a more specific goal, like increasing the value of assets in a specific area but not another, e.g. at a given point you might want more property and less shares or the other way round. Or is you ‘net worth’ goal more like mine? While some people will focus on increasing the gap between their assets and liabilities and don’t mind getting to retirement with debts. My personal goals is have the liability side of my balance sheet equal to zero by my effective retirement date of 50. At that point, I don’t plan to carry any liabilities. I will probably still want to work after that date but we will own our home and any rental properties outright and we’ll maintain our current no debt lifestyle. If you’re wondering how wealthy you are relative to other people in Britain I have some interesting data for you that I found on a BBC article dated July 2019: Apparently, wealth of £105,000 per adult would put your family in the top half of the population. By contrast, debt and a lack of property and pension wealth means the bottom 10% of families have less than £3 per adult. This says two things about wealth to me:
For the UK:
These statistics ignore age but we all know that wealth accumulation is a slow boring process so wealth levels tend to increase as people get older. So, it’s no surprise that 60-somethings (those born in the 50s) are the wealthiest age group, with average wealth equivalent to £332,000 per adult. Many 60-somethings are approaching the end of a career and have had time to accumulate savings, pensions and property.
Inheritance is going to be a big source of wealth going forward but again, property ownership matters a lot here. According to the BBC article which was itself quoting the Resolution Foundation, “millennials - the generation currently aged 19-38 - are set for an inheritance boom in the future. But it's a long way off, with the average millennial not expected to receive it until they reach 61.” It adds that, “Nearly half of millennials who don't yet own homes have parents with no property wealth, meaning they are unlikely to receive a significant inheritance. By contrast, those with home-owning parents are three times as likely to own a home by the age of 30.” Guys, if you hearing anything from this it’s beg, borrow, steal, scrimp and save and get yourselves on the property ladder to build a security blanket for yourselves – no pressure! Also, don’t shoot the messenger. Said BBC article had a large number of cynical comments under it – and a few helpful ones. How about wealth by race?!! … It was hard to find UK wealth data sorted by race but I did find home ownership stats: Overall, 63% of households in England were homeowners in 2016/18 (around 14.6 million households) Top three home owning groups in 2016 to 2018 were:
The bottom home owning groups were:
My group ‘Mixed white/black African were not much better at 34% All interesting things. So, in summary, if you want to increase your net worth without putting excessive effort into it, I would suggest as follows:
I hope this helps! Heather x Have a money question for me?
If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
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Hi Heather,
Happy new year! I’m a big fan of yours and have been following you for a while. I bought all your three books. I would like to open a stocks and shares ISA for myself and two children aged 16 & 14 but I don’t know where to start due to fear of risk. I want to invest 15% of my income in stocks and also considering real estate. I have seen some recommendations like Vanguard or Hargreaves Lansdowne but I’m clueless on what to go for. I am a nurse and the only debt I have is a repayment mortgage. I just finished paying off credit card debt. I saw your post on Malawi Queens. Please help. Thank you My name’s Angela by the way. 
Angela – congratulations on getting rid of all your credit card debt, you must be super proud of yourself.
And a massive thank you for supporting me by buying my books. Book sales are helping to pay for the production of “The Money Spot” podcast so I don’t take your purchase for granted – it’s really appreciated. Stocks and shares ISA When it comes to investing in stocks and shares ISAs, target a minimum investment period of 5 years and ideally your should invest for much longer than that. Is the money that you want to save for your children for university or for something else? I will assume it’s to contribute towards the cost of university. One important thing that you need to keep in mind is that although tuition fees are given to students as long as they apply for them, the maintenance loan is assessed according to household wealth; basically, children that come from wealthier households are eligible for a smaller maintenance allowance. Only children from households with a total income of less than £25,000 qualify for the full maintenance loan. In addition, students that live at home get a smaller maintenance allowance and those that attend universities outside of London qualify for a lower maintenance loan. In my opinion, the less debt children can get themselves into by the time they graduate, the more disposable income they’ll have when they land their first jobs and the faster they can save for a deposit on a mortgage. If you want to read a little more about what you might need to contribute towards university costs, have a look at the moneysavingexpert.com website. The site has a ready-made calculator that will tell you exactly how much you need to save for each child to contribute towards university. Or, for parents that don’t want to contribute then it’s how much their children will need to earn from a uni job to fill the gap. The calculator will also tell you exactly how much you need to save every month from now to make sure you have enough by the time your child starts university. Child aged 16 For your 16 year old, saving into a stocks and shares ISA is too risky because university is just around the corner – the stock market generally doesn’t offer good returns for periods of less than 5 years. The safest option for the 16 year old is probably to save into a high interest account, this might not be a cash ISA so shop around. The best rate you will find at the moment is between 1.45% to 1.65%. Child aged 14 As you could put money away for five years for your 14 year old, a stocks and shares ISA makes sense here. Again, use the calculator on money saving expert for an idea of how much you will need to contribute each month if you don’t want your children to have to work through university. Your ISA For your own ISA, you have a limit of £20,000 per year. If you prefer, you can save all the money into your own ISA rather than into junior ISAs so that you have more control over it. Money saved into a Junior ISA is legally belongs to the child named on the account when they turn 18 and you would have no control over how they choose to spend it. Risk Before I tackle where you should save I will say that you have every right to fear taking risk with your money, you’ve worked hard to earn it so you should rightfully want to preserve what you have earned. The safest path if you are investing in shares is to avoid single stocks and to invest in diversified index funds. There are two main types of fund to choose between, actively managed funds and passively managed funds. Passively managed funds track a whole market such as the S&P500 for the USA or the FTSE100 for the UK; alternatively, instead of tracking the whole market in a given country you can choose to invest in a specific sector such as utilities or technology or retail. Actively managed funds have a an actual person choosing what shares will outperform the market and investing exclusively in those. The objective of an active manager is to beat the index, while the objective of a passive fund is to match the return on an index. Now, you would think the funds managed by clever fund managers are the ones to go for, right? Wrong! History suggests that over 95% of the time fund managers do not beat the index. Not only that, fees on actively managed funds are higher. The cheapest are about 0.5% nowadays and the most expensive charge in the region of 2%. Many passive funds now charge less 0.2% or what industry professionals call 20 basis points or bps. How can you improve your risk appetite? Improve your understanding of how stock markets work. I would recommend two investment books, if you can, get the audio versions: Charlie Munger: The Complete Investor by Tren Griffin and Common Sense Investing By John Bogle (the inventor of passive investing) Which platform should you use for investing? I personally use iWeb for share dealing because they are the cheapest but I wouldn’t recommend iWeb for most people because you can’t automate your investing. That said, iWeb have good fund centre that helps you sort through the different indices and allows you to order them in different ways, for example, you can sort funds or shares from those with the lowest fees or starting from those that are enjoying the highest return down, you can also exclusively analyse the different sectors that you might want to invest in – technology is enjoying pretty good returns at the moment but I don’t put too much into tech because it’s volatile it goes up fast and can also come down fast. Even if you ultimately choose to invest using a different platform you might want to use iWeb for stock selection if their analysis tools are better than where you end up. iWeb’s fund centre is actually easier for discovery than HL – HL seem to have a vested interest in people selecting actively managed funds so those show up more prominently on their site. They don’t seem, for example, to have a tool that allows you to just look at absolutely every fund they offer ordered by fees. If I just haven’t found this function, someone please help a sister out and send me the link. So, what platform should you use? The two options you have suggested (HL and vanguard) are very different. The likes of Vanguard only offer their own funds. This isn’t a bad thing necessarily but it would mean you need to be sure you won’t want to invest any other fund manager’s products and that is a hard position for a beginner to take. The likes of Hargreaves Lansdown offer you access to a large universe of fund managers. HL don’t create funds, they are essentially a supermarket for other fund managers. It’s the difference between shopping at Aldi and Sainsbury’s. If you want choice, you go to Sainsbury’s; if you’re not too bothered about choice and want to save money, you go to Aldi, but you’re mostly only going to find Aldi’s own-brand products at Aldi – this is not a perfect analogy but it’s not a bad one. Vanguard’s passively managed index funds are known for being very cost effective but they’re platform charges are not the cheapest. At least not in the UK. The likes of Fidelity have a hybrid model: they offer their own funds and other fund managers’ products BUT if you use their tools for selecting funds, which I did to write this piece, the resulting suggestion is one of their own funds. The biggest driver for where you invest should be fees, customer service and ease of use of the platform. Fees Platform fees are the fees you get charged for using a given platform. Vanguard 0.15% HL 0.45% (if less than £250k and 0 if > £2m) iWeb 0 Halifax £12.50 Fidelity 0.35% Either way, if you have less than £50,000 invested the differences in fees aren’t that dramatic but as you start approaching £250,000 in investments you will feel the difference. Once you have £250k invested, and trust me you will get there, on iWeb you would be paying £60/year (if you trade once a month) and on HL you would be paying £1,125 for the same assets invested. Little tip, because I invest for both my husband and I, instead of splitting monthly investments in half, so half goes to his account and half to me, each month I do one trade for either me or for him so that the net result is that we do 6 trades each. This saves £60 in dealing costs every year. Obviously I could save even more by doing one trade a year but as our incomes are paid monthly it’s better to invest monthly rather than just keep the money in a savings account for one trade at the end of the year. I’d lose all the gains I make within the year. Transaction fees are the fees you pay for buying an investment product – these can be a fixed sum or a percentage. Some platforms will have one charge for buying and selling shares and another for funds. Vanguard depends on the product – 0.02% to close to 2% HL 0 for funds, £12/share falling to £6 a share for 20 trades + iWeb £5 Halifax £12.50/share or £2/month for scheduled investment Fidelity £10/share or £1.50/month for scheduled investment Because Fidelity’s platform fees are cheaper than HL, I am tempted to recommend them but I think you should make the decision. Why don’t you spend an hour a day on each of the following three site: HL, Fidelity and Halifax. Download their apps and see what you think of them. If by the end of that analysis you’re not sure then I will suggest you use HL as a beginner and as you figure out how things work move platforms, it’s very easy to do that. Also, it’s worth mentioning that I pulled a couple of funds that I invest in on Fidelity and you pay more for them via Fidelity because HL negotiates discounts with actively managed funds due to the volume of business they direct their way. NOW – I have spoken a lot about investing as I felt that that’s what you wanted me to focus on but I think this discussion would not be complete without me saying that, ultimately, if the stock market scares you, then you can go the property route. Property There are many strategies you can follow with property. You can rent to families, or students or even another subset of people. One of my friends specialises in letting property to truck drivers. Letting to students or a migrant group like truck drivers has high turnover which means you need a lot of time to manage the property. And if you went down the AirBnB route that’s like managing a hotel because you have to think about changing sheets and cleaning literally week-on-week – as involving as it sounds, I have a friend who has a full time job as a professor and has also grown a good property portfolio on the side with a mix of AirBnB and family lets. The key is to start with your first property. Have you heard of the 3 for 1 property strategy? With this strategy you set a goal of investing in 3 buy to let properties and you work to have all mortgages paid off by the time you retire. This would mean that you live in one fully paid off house and you would live off the rent of the three properties – this reduces the risk somewhat. For each buy-to-let property you would target a given amount of rental earnings that you can choose yourself . For example if each property earned £800 per month, then you would retire on £2,400 / month. This would be linked to inflation because as prices rise, rents also tend to rise and sometimes rental increases rise far faster [example]. If this feels safer for you and you have at least 20 years until retirement then think about either just going for the 3 for 1 property strategy with a good lump-sum saved in a savings account for emergencies might feel less risky OR follow a combination of investing small amount in the stock market with property as your security blanket. Massively enjoyed answering this question, Angela, especially from a fellow Malawian. It’s nice to know other people are investing and getting wealth focused. Let’s summarise what you need to do:
I hope this helps! Heather Have a money question for me?
If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
Hi Heather,
My name’s Wendie. I am a support worker and earn about £1,600. I struggle to make savings due to all my commitments but I desire to start no matter how small. Please advise. 
Thanks for this question Wendie…rather than talking about all the different ways you can save, I thought I would tackle your question by talking about 9 of the top mistakes that people make with money. Also, you haven’t given me any extra detail about your life like your marital status, age and whether or not you have kids so some of these things may not apply to you.
So, what are 9 of the most common mistakes people make with money? 1. Not believing you can achieve financial independence If you don’t believe, you don’t bother. If you don’t bother you’re less likely to achieve. Wealth is very rarely ever an accident and when it is an accident, like when you win the lottery without having pre-planned how that money will be spent, you usually lose it. According to cnbc.com, “Lottery winners are more likely to declare bankruptcy within three to five years than the average American.” This result is not going to be very different for the average Briton. Easy come, easy go, as they say. 2. Not thinking about money You don’t want to overdo thinking about money but it is important to think about it at least a few times a year to make sure you don’t get to retirement age and realise you’re done working or worse, that your body’s done working but you don’t have the resources to stop working. 3. Not talking about money or at least reading about money A LOT of the things I have learnt about money come from people I just chat with and even more from reading random books on money. I have had tips shared with me on what to invest in, what to read, how to save money and so on. And, if you want something to read that will inspire you I’d recommend to classics: The Richest Man in Babylon by George Clason and The Millionaire Next Door by Thomas Stanley and William Danko – I read both of those within a couple of years of graduating from university (15 years ago this year) and I still inspired by those books today. 4. Not getting a will If you have anyone that depends on you to survive, you need a will, period. This is especially important if you have children under 18 and amplified if you’re not married but in a relationship, possibly to a man that isn’t the father of your children. 5. Not getting life insurance Again, if you have anyone that depends on you to survive, you need life insurance, period. I went onto moneysupermarket.com to work out the cost of £250,000 of level term insurance for 25 years for a 40 year old healthy but overweight support worker. The cost was only £19 from a reputable insurer like AIG. 6. Not getting critical illness cover on your main home The most shocking thing about getting seriously ill is that absolutely no one ever expects it to be them, no one. That’s why it’s a good idea to have it. Most people get enough to cover the cost of paying their home off if they get critically ill and to keep the price low they get decreasing term cover. With this type of cover the amount of insurance money you get falls over time just as your mortgage would. It makes the cover more affordable. 7. Not tackling debt Debt increases your risk of ruin. Risk of ruin is a concept from the fields of gambling, insurance, and finance and it relates to the likelihood that someone will lose all of their investment capital. For general life, I use risk of ruin to mean that you end up in extreme financial problems. A few financial setbacks can lead to you not having the money to pay of bills, credit cards and loans and the more debts you have, the higher the chance that even small setbacks will send your financial life tumbling. If you have debts, it’s a good idea to get rid of them and never get back into debt again. If you can avoid credit cards, your chances of accumulating debt will fall. Although credit cards can build up points, travel miles, the fact is, the biggest thing that they build up is long-term, excruciatingly expensive debt. They’re debt traps. They can catch out even the smartest of people and they often do. 8. Not buying a home I think this is the biggest mistake you can make. Rent or mortgage payments are typically people’s largest expense. If you can wipe this cost away then you need so much less money to live in old age or whenever you’ve wiped the mortgage off. 9. Not investing in your self Investing in your self is about getting the qualifications and the type of experience that will lead to higher paid opportunities. If you think you don’t have the money to pay for education looks into grants. I decided to check out the cost of taking a degree course at the Open University and it looks like a degree taken part-time over 6 years would cost about £6,000 in total over those 6 years (that’s about 1,000 a year) which is 5 times cheaper than the £28,000 that students now pay for a three-year degree from a regular university. If your personal income is £25,000 or less, or you’re on certain benefits, you could qualify for the Part-Time Fee Grant and funding to cover 100% of your course fees. Definitely look into how you can improve your CV to move up the food chain in the job market. Last but not least, I decided to look into what Support Workers earn to see what a career path in Support Work could look like. In one google search I found the following Support worker salary statistics on adzuna.co.uk. These were the live stats on 1 February 2020 from Adzuna’s database of over 1 million job ads.
The salary varied a lot from area to area: The average in Newbury was £28,500 based on 67 jobs and the average in Caerphilly County was £54,000 based on 51 jobs – have you thought about moving areas? This is a huge difference in earnings, it’s the difference between struggling to pay off debt and saving well. Go to adzuna’s salary stats centre and study your profession. [link in blog] 1. Not believing you can achieve financial independence 2. Not thinking about money 3. Not talking about money or at least reading about money 4. Not getting a will 5. Not getting life insurance 6. Not getting critical illness cover on your main home 7. Not tackling debt 8. Not buying a home 9. Not investing in your self Hope this helps, Wendie. Good luck hitting your saving goals Have a money question for me?
If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
Hi Heather,
My name’s Barry and I hate budgeting…it’s not so much the budgeting but tracking all my spending; it kind of sucks the joy out of life. I can’t stand having to think through how my money will be spent and not being able to buy what I want just because it wasn’t budgeted for – am I doomed to always be broke because I don’t budget? Do you have any suggestions for me? 
Hmmmmm
Barry you raise a very interesting question. In fact, I had to think about whether I actually like budgeting myself or whether it’s just a habit I have got into over time. My answer is that I don’t think anyone loves budgeting or having to watch every single penny but when people see the benefits of operating a budget they get into. When you know your income will last until the next pay day because you’ve planned well you’re less stressed out about your finances. I have a certain friend who puts every single penny that he spends into a spreadsheet, well, it was a spreadsheet back in the day when he told me how he was managing his money, I hope he’s now found some reliable app for that purpose. When I saw his system of managing money I literally lost the will to live and that’s how I came up with what I call the “set and forget budget” or “loose budgeting” for my own money management. I love the quote "A budget is telling your money where to go, instead of wondering where it went." It was first said by John Maxwell but Dave Ramsey popularised it. Anyhow, rather than watch every single penny, the “loose budgeting method” involves creating spending buckets and allocating a fixed amount to each bucket with loose rules around how that money can be spent. If you do it properly, this “set and forget” way of managing money means you will only need to make changes monthly if your income changes a lot from month to month or annually if you are on a stable and fixed income. You might do it a little more frequently at the outset as you’ll need to tweak the different buckets until they are just right. But first, what is the point of the whole ‘set and forget’ budget? The objective, once you’re done dividing your cash into different buckets is to figure out your financial lane so that you can stay in it! You’ll know once done whether your finances can support a daily latte habit or a weekly shopping for clothes habit. You’ll know whether buying lunch every day when you work makes sense for you or not. Once you figure out what lifestyle your finances can support then you can start working building the habits that will help you reach your goals. Step 1: figure out total income after taxes and deductions Before you create the loose budget you need to figure out what you earn annually after tax, pension contributions and any other deductions such as student loan payments. Basically, figure what lands in your bank account. If you are paid a fixed wage this is relatively easy to calculate using listentotaxman.com. If you’re married and manage your income as a single unit, like my husband and I, you’ll need to add up the two incomes. Step 2: decide what will be saved the allocate the other buckets When you have total income deduct the total amount you want to dedicate to saving and the total to any other big expenses you want to commit to like school fees or buying a car. Once you’ve done this you’ll know what total is left for household spending and you’re ready to create buckets. You might need to tweak the savings amount if after doing this exercise you realise you’re over saving and haven’t left enough for household necessities or if you are under saving and could save more. This is what my household’s buckets look like, keep in mind that each bucket is for monthly spending and I track it in Excel because it’s convenient and because with the loose budget you don’t need to track spending so much. My husband and I manage our total earnings as one pot after deducting a little bit of pocket money that we each keep for personal hobbies and such like: Monthly Bills 1. Children’s saving This will be a bucket for some and not for others (podcast episode 2). 2. Your savings Once this is set you’ll set a standing order so that savings leave your account as soon as you are paid. 3. School expenses for yourself or children If you pay any sort of fees it’s best to pay the fees to another current account as soon as you’re paid. For example, if you pay fees 3 times a year spread the cost of fees out across several months so fees don’t come as a shock every time. 4. Mortgage This will be fixed based on your mortgage agreement. Our household rule is to keep mortgage payments low enough so that one person can pay them. So if you’re in a relationship, the loss of one job wouldn’t be devastating because payments are within the means of one earner. I also like Dave Ramsey’s rule of keeping payments to within 25% of household income based on 15-year repayment plan BUT I think a 15-year mortgage is not affordable for many people because the ratio of house prices to income in the UK has gone a little crazy; what might might be a better target is getting mortgage free by age 50 or 55. 5. Council tax This is fixed and unavoidable. 6. Water Pretty fixed and unavoidable if you're not on a meter but if you have a meter you can make cuts. Budget for the maximum water bill you expect. 7. Gas & Electricity Pretty fixed and unavoidable. Budget for the maximum energy bill you expect. 8. Homecare insurance I always have homecare insurance so that unexpected heating and plumbing leaks and breakdowns are covered. 9. Life Insurance or mortgage insurance If you have this it’ll be fixed. 10. Broadband This is relatively fixed but you should shop around for a cheaper deal at least once a year. 11. TV licence This is completely fixed. 12. Groceries Groceries includes food and any basic toiletries and household cleaning products. Set your groceries budget high enough that you can buy treats from the supermarket – by treats I mean the type of high quality foods that will help you avoid spending on takeaways or restaurants meals. Things you really like. It doesn’t make sense not to buy the £10 salmon that will feed a family of 4 and then go out to a restaurant and spend £40 or £50 to eat the same thing. That’s the definition of false economy. 13. Ad hoc expenses The ad hoc account is for annual expenses such car services, car tax, car insurance and MOTs. If you want to do any basic house improvements I would add that here and save up for the full cost. I also use this in case I "run out of money" before the end of the month, for example, because I bought too many things on Amazon which are not individually budget for. This is all the non-negotiable hard-to-cut-back stuff added to the budget. Savings can obviously be amended but if you set a realistic savings goals to begin with, you shouldn’t need to change that. 14. Transport This pot might have flexibility if you can choose between public transport and your own car. 15. Fuel To the extent that you make lots of non-work or childcare-related trips, this is flexible. 16. Cleaner This is the ultimate luxury and if you were strapped for cash would be an obvious thing you could cut out of your life. 17. Meals Out Based on how much money is left after all the important stuff this might have to be zero in some months. Before we had kids my husband and I spent a lot on eating out now we have months when not a penny is spent in eateries including coffee shops. 18. Memberships and subscriptions to magazines, newspapers, Amazon prime, Audible, Netflix, sky or virgin TV, etc. 19. Charity This is flexible in theory but in practice is hard to reduce. 20. Other stuff ... Clothes? Make-up Finally, once I have the total budget I add a cushion of £100 to £200 for unbudgeted expenses like a trip to B&Q for mould remover or household things like spoons all disappearing, you know - life happens! This exercise would get tedious if you were trying to do it all the time but as a one-off it can be quite fun. I have found the money dashboard app helpful for getting an overview of what I spend in various areas. Maybe it can help you too. Once you've done this exercise it will hopeful draw out where you can cut expenses and hopefully it might bring any bad spending habits to light. Because the British tax year goes from April to April I usually pay closest attention to my budget just before the tax year and in November as I prepare for Christmas because that's when i am most likely to lose it with my spending. I hope this helps, Barry. Have a money question for me?
If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
Hi Heather,
I’m Melissa. As a full-time entrepreneur myself, I often find a difficulty in deciding how much monthly income to re-invest into my business and not OVERDO IT. This reminds me of why I often lose at the board game "Monopoly", ha! Because I'll spend every last dollar on buying up houses and hotels and when I fall on someone else's property, I don't have the money to pay them. And it's a downward spiral from there, haha. Anyway... I'm sure you know just as well as I do that our businesses are our babies and sometimes we think we aren't feeding them enough to grow as fast as they can. But at times, over-investing can cause immediate problems. What should I do to find a balance between re-investing as a business owner and putting money aside? 
Hi Melissa,
The trick to answering this question is uncovering what your goals are for the business and what your goals are for your private life. This will both allow you to decide how much to take out of the business and also when to exit the business, if ever. I ran my own business from 2012 to 2017 and I had to answer this question myself. In the first year of the business I earned very little but I had saved over GBP60,000 because I knew I wouldn't make money from the get go. This is the reality for most businesses but from your question it sounds like you are past this stage and have some cash coming in, well done! You've gone past the first hurdle. So, what kind of business are you running?
I’ll define the three categories: The Lifestyle Business A lifestyle business to me is one where you want to earn enough to support all your needs and a good portion of your wants. You don't hire too many permanent staff - perhaps you have a couple of virtual assistants - for your social media and bookkeeping and use freelancers for everything else. The 'grow and sell' business With a ‘grow and sell business’ you’re a little more focused on the business than on yourself so you’re a little more willing to “suffer” for a period of time by cutting off all wants and just extracting enough for your needs because the business comes first. You want to get a consistent level of year-on-year growth and you want to track several observable metrics that will make it easier to sell your business in a time frame which you set. Sales numbers are the best metric to track but even social media statistics can be something worth measuring: healthy email lists, social media accounts with real followers, that kind of thing. The legacy business A legacy business is one that has to satisfy your income requirements for a prolonged period of time with a view to passing the business on to your children or selling far in the future if your children are not interested in running a business. Once you’ve decided the type of business you’re running, then you need to go through the following process: 1. Figure out how much cash your business needs every month? This is your, “monthly cost of operations” Some people think running an online business is virtually cost free but you and I both know it isn't so. Sit down and calculate the minimum amount of cash the business needs to have just to keep chugging along. This should include the cost of all your tools: email marketing software, social media software, graphics tools, website hosts, budget for freelancers and other staff costs, advertising! Back in 2012 when I started my business you could get a decent level of exposure for free, Facebook posts on pages were actually shown to people that had liked the page and you could monetise that exposure. Nowadays you have to spend money to get even low levels of exposure. You probably also need a budget for taking courses that will help you grow your business. The marketing techniques that work are constantly changing and you will need to keep on top of marketing intelligence to grow your business. So, it really is worth sitting down to figure these costs out. Once you have the number, you’ll know the minimum level of money you need to leave in your business bank account every month. Divide annual costs by 12 so that you have a reliable monthly cost of operations figure. 2. Figure out how much you need to live. This is your “monthly cost of living” If you are fortunate enough to have your living costs mostly met by your parents or your partner then this won't be a large number. My husband supported us for a good portion of my self-employment but I paid myself enough to cover my lifestyle costs: beauty products, going to cafes with friends, clothes, that type of thing and when we had our son, I made sure that the business covered his nursery costs too because the only reason he was going to nursery was because I needed to work. Ultimately, this meant I took out about £600/month to cover four half-days of nursery each week and £670/month for myself. The amount I paid myself wasn’t random: my accountant set my wage level just low enough not to have to pay national insurance tax. You will have to consider the tax impacts for yourself. That threshold moves every year. You could pay yourself more through dividends but speak to an accountant to get the balance right because if you pay dividends too often the taxman could say it looks like a salary and should therefore be taxed at the higher earned income tax rates. If you can live on less than the sort of figure I am suggesting, even better. If you're not living in a supported situation and have to pay all your own bills then this number could be much larger. So, having done steps 1 and 2 you will know the minimum amount you need to keep the business going and plus the minimum amount the business needs to make to keep you going too. Is your business producing at least this much? I hope so. 3. How much do you want to save? The next step is one I regret not having given enough focus when I was self-employed. I didn't save much at all for the household in that entire time. In fact, the only person that built up any savings is our son who had about £12,000 by the time I ditched the business and went back to work. In fairness, the business was not making enough for me to save but if I think back I could probably have managed to put away £300-500/month for the family if I really wanted to. I didn't suddenly start earning more when my son was born so the fact that we managed to find over £300/month to grow his savings shows the money was there. To decide on the ideal amount of money to save every month, project how much money you want to have at the age when you want to retire then using an online retirement calculator to figure out how much you ought to be saving every month. I found a good UK pension calculator on PensionBee.com and a good US retirement calculator on vanguard.com.
If you are running a lifestyle or legacy business and the business is generating not only enough to support operations but enough to save and live. Fab!
So, how's this different for a 'grow and flip' business? If you are building a 'grow and flip' business then I wouldn't worry too much about the savings elements. If you can sustain operations and yourself then you can continue running the business and ploughing all excess money back into it in the hope that you will sell the business for a good lump-sum in say, 5 to 7 years. Because this is a higher risk strategy you need to decide when you will quit the business. You can't continue running a business that doesn't allow you to put money into savings and investments indefinitely. You need to decide for yourself the point at which you will decide it isn't work. In summary: What you take out of the business depends on: 1. What the business needs to keep going. 2. What you need to live. 3. What you need and want to save. To attach some numbers to this discussion: Example 1 If your business is generating at least £1,500 every month (for example purposes) and it needs £800 to just keep moving then there's £700 left for you to either take for yourself or re-invest in the business. If £700/month isn't enough to meet your living costs then you need to figure out how long your savings can support you while you give the business a chance to grow. Example 2 If your business is generating at least £5,000 or more every month and it needs £1,000 per month to sustain operations and you need another £2,000 for yourself then there's still £2,000 to play with. In this scenario, even if I was running a 'grow and flip' business I would save to hedge myself against the risk that my business isn't sellable. A final thought. Ultimately, I left my business because it produced lower profits than I could earn in "regular job" and fortunately for me, I discovered that I actually love the routine of going to work and communing with my colleagues. If over a two to three year period the business is generating you, say, £30,000/year and you know you could earn £50,000, £60,000 or even £100,000/year working, have a deep think through whether the long hours of building the business are worth it. Many glamorise entrepreneurship but we both know the hours can be long and hard and the returns inconsistent from month to month and year to year. For knowledge workers (Economists, lawyers, researchers etc. – desk-type jobs), the in-work flexibility is unreal nowadays and you could pretty much set up your life to be more flexible than an entrepreneurial life, with much more free time and real holidays where you actually leave your laptop at home! Sorry if any of this last bit sound discouraging but I promised myself that when I blog about business I will always give people a real sense of what it's like. There are enough blogs out there pretending every 'trep is a millionaire when the reality is that the average self-employed person in both the UK and the US earns less than the average worker – shocking, right? Hope this helps, Melissa. Have a money question for me?
If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
Hi Heather,
My husband and I want to buy a house, how can we go about improving our credit score? Chrissy Hi Chrissy, This is an awesome question. I think lots of people come up against this issue at one point or another. Before I get into the detail, straight off the bat I’ll tell you what you don’t need to do, you don’t need to get a credit card. You can build excellent credit without a credit card despite what people say about needing a credit card to build a credit record and strong credit score. Now that I’ve got that off my chest let’s start from the beginning? Firstly, what is a credit score and what’s it trying to achieve? A credit score is a number that’s designed to be an indicator of your creditworthiness. This means that the credit score gives lenders an indication of how good you are at paying your debts and how likely you are to default and not pay them. Lenders only want to lend to people that are likely to repay that money and the credit score is an indicator of your likelihood to repay. Your credit score is built up using all the information a credit reference agency has collected about you over time especially over the last 6 years; information older than 6 years usually doesn’t weigh into your score. The credit reference agencies that you might have heard about are:
You can also go directly to Transunion or Crediva to get a credit report from but they don’t give you a score directly – they only do so via CreditKarma and checkmyfile, respectively. If you want to improve your credit score you need to know what your current score is so you can track it. You can’t improve something if you haven’t measured. Credit scores work in the following way:
How come ClearScore and CreditKarma are free?
Both make money by selling products to their customers. But, in my opinion, the way ClearScore goes about it could land you in unnecessary debt so I wouldn’t recommend them. Under the credit information, there’s a section on ClearScore that asks you “How can I improve my credit score” and one of their pointers if you don’t have a credit card, is that you get one. CreditKarma aren’t so brazen. I feel as though ClearScore keep my score artificially and strategically low to nudge me towards that credit card. So, if you do use ClearScore, know that even if you pay your debts on time, are current on all your bills and are essentially doing everything you should to be classified as financially responsible, you won’t get the top credit score if you don’t have a credit card. I am very anti-credit cards so I would never get one and this one aspect of ClearScore annoys me and stops me from using them. With all this knowledge about the agencies, this is what I recommend you do to improve your credit score: Firstly, get a CheckMyFile credit report and credit score. As I mentioned, CheckMyFile’s score is out of 1,000 and based on information from 4 agencies; you will be able to view a lot of the information that all 4 agencies hold on you. Second, I suggest you check your credit score only (not the credit report) at Experian. Experian have a service where you can view your score anytime for free but you won’t be able to see the full credit report under that service. Because you are getting an Experian report via CheckMyFile there is no need to get it directly from Experian too, at least not in the same month. The reason I am suggesting you get your Experian score (which is out off 999) is that I find their score very responsive to changes in your financial footprint. If you pay off debts and so on, the Experian credit score improves within a month or two and it’s actually possible to get a perfect Experian score of 999, I have had that several times. In my experience, Experian’s credit scoring system is the most legitimate and reliable. Make sure you unsubscribe from CheckMyFile before a month is up because they will start charging you £15 per month after that. This will mean you lose access to credit reports and the checkmyfile score but that’s okay because you will have the Experian score and to check your credit report on a regular basis, just use CreditKarma. The level of detail Credit Karma has is actually very impressive. They actually have financial details on my profile that Experian seem to have missed and yet, outside of the little bits of missing data, Experian is generally the most comprehensive. FYI, Experian is not paying me to say any of this. Okay, so what can you do to improve your credit score?
These are the things that will have a huge negative impact on your credit score:
In summary, what should you do to improve your credit score:
Hope this helps, Chrissy. Have a money question for me?
If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
 What's the point of saving?
Hi Heather,
Based on the things you told us about investing, my husband and I started putting £125 per month each into our SIPP pension. I hope this isn’t a silly question but what are these savings for? When can we expect to start spending that money and should we try to spend it in specific ways or on specific things? Both my husband and I are 30, we don’t plan on having children and our jobs have fixed pension benefits. Thanks Flora Hey Flora, That’s a great question. While everyone has a different value system, there are two main reasons that I strongly recommend that people put money into a self-invested pension plan or SIPP a) flexibility and b) security including funds to help pay a mortgage off early. A SIPP can be better than a stocks and shares ISA, in some cases, because you effectively pay less tax and because you can’t use the money until you are about 58 so it forces you to save. Let’s talk about each reason in turn: The first reason: is flexibility over when to retire In the past, a lot of work-based pensions (aka defined benefit pension plans) used to allow early retirement from between the ages of 55 and 60, most of these type of scheme are being completely phased out and are instead being linked to the state retirement age which for you is currently expected to be 68. There is talk of moving this to age 70, so this is a future possibility. Whatever happens, the funds that you build up in your SIPP can be taken from 10 years before the state retirement age. This means if the state retirement age moves to 70 you will still be able to use money that’s sitting in your SIPP from the age of 60. If you and your husband are putting £125 each into a SIPP then when you are 55 years old, you and your husband’s combined pot of savings would be worth £135,000 if the pot of money only grows fast enough to keep up with inflation of about 3%; if you get growth equivalent to the average stock market return of 7% then you would have £250,000 at the age of 55 and if you get an average stock market return of 10% you would have £410,000 saved up. At age 60 the figures would be £180,000 @ 3%, £375,000 @ 7% and £700,000 @ 10%. These sort of returns aren’t cuckoo. According thebalance.com, “the S&P 500 Index, delivered its worst twenty-year return of 6.4% a year over the twenty years ending in May 1979. The best twenty-year return of 18% a year occurred over the twenty years ending in March 2000.” Various sources suggest the S&P 500 has returned 10% before inflation if you buy and hold the money you invest into it. But of course, it’s useful to remember that this past success doesn’t guarantee that future returns will be as good. Right now you would struggle to find a bank account that gives you an interest rate of 1.5%. Back to flexibility on when you retire, however, unless you believe the US has no room for growth, then this total of £250/month you are saving could amount to a lot of money over a 25 to 30 year period and this would allow you to retire with a decent income well before the state retirement age. If your mortgage is fully paid off by the time you retire then your cost of living could be low enough that even a modest growth in the SIPP would provide a comfortable income before your state pensions and work-place pensions kick in. The second reason: to save the money is the added security from having extra retirement income Having money in a SIPP means you can top up your retirement income. Having the SIPP would mean you have 5 sources of income:
If the pension income from your jobs is lower than your final salary having access to extra funds will mean you can more or less maintain your lifestyle. This will be especially important if one person lives a lot longer than the other. There is one special feature that the SIPP has but all the other 4 pensions do not: and that’s the fact that if you or your husband dies the state pension stops coming through and the work-place pension either stops completely or is massively reduced. However, whatever money is outstanding in the SIPP would fully transfer to the spouse without penalty. Just to be clear, I will make that point twice: a work-place pension either dies with the person and at that point the spouse receives nothing or, from that point, the spouse gets a heavily reduced benefit – usually 50% or one-third of the amount that was being received before their spouse died. A LOT OF PEOPLE forget this about SIPPs and other defined contribution pensions. I won’t go into the differences between defined benefit and defined contribution pension plans here but if someone is interested go to themoneyspot.co.uk and leave me a voicemail with your request. Finally, when can you expect to start spending that money and should you try to spend it in specific ways or on specific things? Technically, the plan is that you will never have to spend the capital but can just spend the growth. If the fund is worth £250,000 when you start drawing from it and you are earning a 10% return per year at that point, then you could just withdraw the 10% (i.e. £25,000) or less and spend that. If your withdrawal rate is lower than the growth rate of the fund then your retirement would continue to grow even as you take money out. Note that some research suggests that the ideal withdrawal rate to maximise the likelihood that the money will never run out is 4%. But given you have pension income from your jobs in addition to the state retirement and you’re not worried about passing wealth on to children you could be more aggressive than this. As for how you spend that money, well that is up to you and is a great problem to have. Having more money doesn’t only mean more holidays, it also means you can buy private health insurance which might be a necessity to avoid NHS waiting lists at a time when health problems are more likely. This would give you a lot of peace of mind. Ability to pay mortgage off early One thing worth adding, is a note that once you can withdraw money from your SIPP you are allowed to take 25% out as a tax-free lump sum. If your household had £250,000 saved up, you could take £62,500 out in one go which could be used to clear all or most of your mortgage. You would then be allowed to take the rest out as an income or you could buy an annuity – with an annuity you essentially buy a fixed income which keeps being paid to you for the rest of your life. I wouldn’t recommend an annuity for you given you have two fixed pensions coming in already, you don’t need the extra security and annuities don’t tend to be worth the money now that interest rates are so low. What you could do instead of buying an annuity is withdraw what you need from the SIPP every year. You would pay taxes based only on what you take out and could manage the withdrawals to minimise the tax bill. I hope this helps. Heather Have a money question?
Hi Heather,
I want to earn extra income, however I work as a nurse in the NHS which takes up my time, do you have any suggestions on any investment that can make money. I am also interested in the stock market but don’t know where to start. I am interested in both generating extra monthly cash flow now and increasing the amount of money I have in retirement. Denise. Hi Denise, Thanks for this question. I love it because I have two nurses in my immediate family, my mother-in-law was a nurse for a long time and my cousin is still one now. Boosting current income
The, “how can I make a little extra cash now” question is one I asked myself quite recently because I wanted to put extra cash into our household ISAs. There are a few things you can do to boost your cash now:
1. Working extra shifts / locum shifts My mother-in-law says this is not a great idea because being a nurse is hard enough work, as it is. I agree that it is very demanding work but one of the great features of working at the front line of medical services is that you can actually make more money by working more hours, even temporarily. Some jobs don’t offer opportunities to earn more by working more, you’re paid a fixed annual salary and that’s it - no overtime. Overtime either goes uncompensated or is compensated as time back in lieu. You can sign up to a locum agency and do the same type of work for higher pay on your free days. If you want to really juice up your income you can even look at things like working a 4-day week in your regular NHS job (your NHS pension would therefore be lower) and work for a locum agency on the 5th day. The advantage with this strategy is that you will boost your income without working more hours because the hourly rate is higher as a locum nurse. If the extra income is invested wisely it could more than make up for the lower NHS pension. Also, keep your eyes open for higher paying promotions. 2. Do some extra work in another field. If you have another skill that you can monetise you can look into doing extra work in that field. So ask yourself, "what other skills do I have?" I'll give you an example from my own life: In my early 20s when I worked in banking the bonuses were not good one year and to make some extra money I slipped flyers into doors offering massages (for women only) at my house for £25/half-hour. I had someone sign up that very day. I had done a course in therapeutic massage at London College of Massage for fun and when I needed it, that skill helped me boost my income. I didn’t do it for long but it showed me that if I wanted to earn more money I could monetise other skills in my free time. There are some things you can do that don’t even need a new skill such as babysitting. You could sign up at childcare.co.uk or sitters.co.uk and your credentials as a nurse would be very attractive to people that needed a babysitter for nights out or weekends. You haven’t said whether or not you have childcare responsibilities of your own so I don’t know if this is possible for you. If you have skills that you can monetise online then list yourself on freelance websites like upwork or fiverr. There is a wide range of professions people hire for on these sites. I have used these sites myself to buy all manner of things including artwork, copy, copy editing and even voiceovers! Imagine that, all you’d need as a voice over artist is a microphone that records your voice clearly. Some people make serious money side-gigging on these sites. These first two options are not completely aligned with your question as you asked for “investments that you can make” but I decided to add them to give a fuller answer. 3. Invest in or produce products that make cash. Investing in something necessarily involves parting with money in the hope that you’ll earn even more money. You haven’t said how much money you have to invest so here are a few options. Can you make something that people would be interested in buying that you can sell on etsy, eBay, amazon or Facebook marketplace? Make a few samples of what you want to sell and list them on all these sites. I ran a product business myself for almost 6 years mostly using Amazon so I would recommend that you:
I would never discourage anyone from starting a business but having experienced it, I would tell you that it is very hard work. It involves a lot of long hours and is nothing like as glamorous as our culture makes being an “entrepreneur” sound. A business could consume absolutely every free moment you have – evenings and weekends. And all that time might not even produce a profit. Investing in a business comes with a lot of risk – stats vary depending on source, however, 80% to 90% of businesses fail in under 3 years. 4. Teach Could you make money teaching something online? You could create a course and list it on Udemy, Teachable or another similar site. This would take some time to produce well, in the first instance, then you would need to spend some money on marketing your course but you could keep the costs very low. Alternatively if you want to teach a GCSE or A-Level subject (High school level) or even a university course level, you can sign up to places like tutorful (previously, tutora). 5. Invest in property. If you have enough for at least a 25% deposit then it may be worth looking into property investment. Because interest costs on buy-to-let property are no longer fully tax deductible, (that means, you can’t subtract the interest payment from the rent you receive before calculating your tax bill), property is not as attractive an investment as it used to be. That said, if you can buy a place with cash, or if the property produces a high enough profit to clear the mortgage within a reasonable amount of time (I personally target 10 to 15 years) then it could be worth doing. Overall, the option you go for will depend on your risk tolerance and the amount of cash you have to invest. If you are relatively risk averse and don’t have cash to invest then working more to earn more will be more attractive. If you can tolerate some risk and do have some spare cash saved up, then investing in property will provide you with medium risk while investing in a business will be the higher risk option. Boosting retirement/future income
If you’re looking to boost future income then you have two main options:
Property investing we've already talked about. The stock market provides a good return over long periods of time; most investment advisors would suggest an investment horizon of 5 years or more. Putting money into the stock market in the hopes of a good return in a year or less is gambling rather than investing, that's why I didn't offer it as an option when we were thinking through how to "boost income now". The most tax efficient options for investing the stock market are investing via an ISA or a SIPP. ISA are individual savings accounts and SIPPs are self-invest pension plans, they are a type of personal pension. If you invest the money via a SIPP then you won’t have access to that money until you are between 55 and 58 years old. The exact age will depend on your age and has been set at the state retirement age minus 10 years. The SIPP is a good option because for every £100 you put in, HMRC pay back £25 of tax and this saving is automatic. It is claimed by the SIPP provider and is shown on your investment account. The maximum you can put into a pension a year is £40,000 or your salary whichever is lower. So, if you earn £30,000/year you can put up to £30,000 into your pension without getting a tax charge. If you earn more than £40,000/year and haven’t reached the lifetime allowance of £1.055m, you can put up to £40,000 into your pension without getting a tax charge/penalty.
I will be writing several blogs on investing over the next few months that should hopefully build your confidence to make the move. In the meanwhile, you might find this useful: What platform should you use for investing and what should you invest in.
I hope this is helpful. Have a question? If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
 Once you have decided on an investment strategy for yourself or for your children you need to decide where to invest and what to invest in. WHICH PLATFORM TO USE FOR INVESTING Choose a platform that has the lowest fees for the highest convenience. Fees change over time but when I was deciding on a platform I found these articles:
In the end, I chose iWeb for myself and Hargreaves Lansdown for the children’s investments. Why iWeb? I chose iWeb because annual fees are zero (after a £25 account opening fee) and you only pay £5 per transaction. As I only transact once a month (on pay day), our annual household fees are £60 and if you consider that I only transact on either my account or my husband’s account in any given month, then we are only paying £30/year per account. More than fair. The main problem with iWeb is that they don’t do junior ISA and you can’t automate investing. I don’t mind manually investing for my and my husband’s ISAs because we invest different amounts in different funds each month. Why Hargreaves Lansdown? They do junior ISAs, they have a good app and you can fully automate all your investing – their customer service is also pretty good; if you call you will get through to a human pretty quickly. Ultimately, I don’t expect the children’s ISAs or pensions to have a value greater than £100,000 before they’re adults so a platform with a percentage fee will tend to be cheaper than one with a fixed fee. When they’re older I’ll advise them to move to a cheaper platform. Which platform will work best for you? Unless you’re an investment buff that actually enjoys making monthly investment decisions, I recommend you choose a platform that allows automation, possibly Halifax share dealing or Cavendish; one of my friends recommends Fidelity. For children, transact within a junior ISA. For yourself or partner, an adult ISA. If you can invest more than the annual limit then use the ISAs first before transacting via a taxable account. WHAT SHOULD YOU INVEST IN? Unless you have a lot of time to research different companies, I would only invest in low-cost (passive), well-diversified mutual funds such as an S&P500 tracker or a FTSE100 tracker. Passive means the fund is not actively managed, it just follows the stock market so your return is essentially the average market return. Research suggests that actively managed funds (ones where a ‘clever’ manager stock picks) generally underperform the market in the long-run. My long-run strategy is to have 70-80% of my money in (safe) passive funds and 20-30% in actively managed funds. ETFs? I don’t do ETFs – I think funds make more sense. Over to you. Have a question? If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
 
Hi Heather
I just had my first baby. I'm 31 and married. Do you have any tips for how I can think about saving and investing for my baby? Thanks, Diana Hey Diana, This is an awesome time to be asking me this question. I also started planning for my first baby as soon as he was born. You will be at an advantage if you start saving and investing for your children as soon as they are born. You will need to balance what you can afford with what you want to achieve for them. Firstly, what’s the goal? What are you saving for?
1. UNIVERSITY University costs c.£60,000 in tuition and living costs for a 3 year course at the moment - £10,000 for tuition and books, £10,000 for living – living costs can be higher or lower depending on whether you live at home, etc.. £60,000 is a huge amount of money and this cost is likely to rise in the future but it makes the maths too complicated to think about possible cost increases. Option 1 for university savings If you can save £20,000 in a tax-free account like a stocks and shares ISA by the time your child is 5 years old, then you can stop putting money aside and this money will have a reasonable chance of growing to £60,000 by the time your child is 18 years old. How could you save this £4,000 per year? Perhaps you could target saving a round amount like £250 per month (equivalent to just over £30/week each for a two-income family) and because this sums to £3,000 a year, at the end of the financial year you’d hustle to throw that extra £1,000 into the ISA before the financial year closes on 5 April. Or, if you can afford it, you could just save £335/month and you would save just over £4,000/year. Option 2 for university savings £4,000 is likely more than most can afford. The alternative is to save £100/month until age 18 which most people can afford even on the median household disposable income of £29,400 (2019). It’s equivalent to about £12.50/week each for a two-income family). Which option is better? I would say option 1 trumps option 2 because you give the money the best chance of growing. Equity markets are volatile in the short-run so by saving the money early you give the money a better chance of reaching your goal. That said, something is a lot better than nothing: small savings add up to large amounts over time. Your savings may be lower than you would like to target but you will still help your children avoid the full scourge of student debt. These are the results under each option: 
Caveats on saving through a Junior ISA:
When you save the money through a Junior ISA, that money will be theirs when they hit 18 and you might not be able to control how they spend it. However, putting it into the Junior ISA means you won’t be tempted to spend it yourself because once the money goes in, it can’t be withdrawn until your child is 18. How can you avoid the Junior ISA so you have more control over the money?
Plan b. is a good option because you could end up not having to pay tax anyway: The capital gains tax allowance in 2019-20 is £12,000. That is, you have to make a capital gain (the profit on your investment) bigger than this to pay the tax. If you save the £4,000 across two investment accounts - £2,000 in an investment account with your name and £2,000 in an investment account with your spouse’s name then when your child is 18 you can sell enough stock each year to keep the capital gain below the capital gains tax allowance. The risk however is that this threshold could fall or be completely removed in which case you would end up paying more capital gains tax on the sale. It’s still a sensible option, despite this risk. 2. RETIREMENT If you followed option 1 for university savings, at age 5 you’ll have stopped doing that and might find that you have some spare money to open a retirement account. Your children will not have access to this money until they are 57 to 60 but if life hasn’t worked this will be a great cushion for them. The beauty of investing in a retirement account is that for every £1 you put in the government puts in an extra 100/80. That is, if you want to save £100/month you only need to put £80 into the account. If you do invest £100 it will be £125/month with the government top up. For kids you can put a maximum of £2,880/year (£240/month) which equals £3,600/year. This is the result if you choose to save £100/month indefinitely into your child’s Self-Invested Pension Plan or SIPP starting from when they are 5-years old: 
You notice that the extra £25 from the government makes a real difference. By saving through the pension, based on a 7% return, on 7-Jan-2025 the investments are worth £9,269 rather than only £7,444 without the government top-up.
Don’t save into a child’s retirement account unless you have the cash flow and are meeting your own goals, e.g. paying enough into your own retirement, paying off your mortgage early and ideally, are debt free yourself (apart from the mortgage). Some will be able to afford the full £240/month from birth, the rest of us have to work out what is realistic, that is why I personally opted for the £100/month from age 5. This decision will change with a change in your fortunes. 3. HELPING YOUR KIDS BUY A HOME This is where the decisions get a little tricky. Some people will be able to afford funding university, helping their children get ahead with retirement savings and help with a deposit on a home without compromising their lifestyle at all but the rest of us need to make choices. Private school vs. saving for a home What will make the biggest difference to your children: a private education or getting onto the property ladder? If you can afford one or the other but not both, then you might follow the route of private primary school followed by state secondary school (grammar/comprehensive). In this case you’d direct all the money you would have spent on a private secondary school education on saving for a home. In some cases this might mean your child starts life with a mortgage free home. If you save £15,000/year (£1,250/month) from age 11 until age 21 (10 years of saving) and it grows at an average rate of 7%, how much money would your child have at 21? About £220,00 – increasing to £260,000 if the average return over that period is 10%. This is not small money to most of us. You could use every last cent on a private education when at the end of the day the thing that helps your child follow a life of fulfilment is being relatively debt free. If you decide to go for a state education throughout and save £1,000/month (£12,000/year) from age 5 (when you are done with university saving) until age 21 (16 years of saving) and it grows at an average rate of 7%, how much money would your child have at 21? About £355,000 – increasing to £475,000 if the average return over that period is 10%, wow. Forget the children, you could be doing this for yourself! If you have already made the decision to send your children to a private primary school and they are thriving, you are unlikely to reverse that decision. If I you are seeing these numbers before making a decision, you might well make a very different decision… Not thinking about private education, anyway? If private school is not a consideration for you, then the best choice might be to save as much as you can towards your own ISA allowance of £20,000/year (£40,000/year in a two parent home), in addition to whatever you save towards your pension (I recommend 10-15%) and when the time comes you can decide whether you can contribute towards university or a first home or both. The best gift you can give your kids is possibly to be independent in old age so they don’t have to worry about taking care of you. You can boot strap them onto the property ladder by letting them live at home rent free – so that they can save more for their deposit. Even without cash gifts, you will be giving your children a competitive advantage by teaching them how to handle money at an early age. Starting to invest Next, you need to consider what platform to use for investing and what to investing in? If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
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Heather on WealthI enjoy helping people think through their personal finances and blog about that here. Join my personal finance community at The Money Spot™. Categories
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Heather Katsonga-Woodward, a massive personal finance fanatic.
** All views expressed are my own and not those of my employer ** Please get professional advice before re-arranging your personal finances.