7 steps to ‘permanently’ fix your finances

I’ve worked as a financial adviser for 14 years, helping hundreds of people devise plans that will help them retire earlier, retire better off, or just be able to sleep well at night. Experience tells me that you better achieve these aims by offering bespoke advice. We are all different and we all have different hopes, fears and aspirations; I see this every day.

But the reality is that the vast majority of investors do not always take or have access to advice. So it sets a challenge: is there something we could say to those people to set them in the right direction. And to further raise the bar, is there a plan that is permanent that requires little or no tinkering?

To repeat, individual advice is key, but if I were suggesting a short-as-possible ‘permanent’ plan, it would be this…

Step 1 - Pay off credit cards and loans and cut them up

There have been times when most of us feel the need to borrow via a loan or credit card, but resist. It is the most expensive type of mainstream debt. Even 0% deals can end up being costly - missing just one payment can trigger the cancellation of the interest-free rate.

Step 2 - Get life insurance

Some generous employers offer life cover to their employees. They understand the need and the importance of ensuring loved ones are catered for in the event of an early death. It is called term insurance because it covers a set period, say 25 years, is paid through monthly premiums that, unusually for insurance, never rise. The cheapest way to buy term insurance is through a discount broker but if you’re in any way unsure, use a life insurance adviser. There are other types of cover to consider but in the interests of keeping this simple, get term cover under your belt first.

Step 3 - Max your pensions, starting with your company pension

Employers are obliged to enrol all permanent employees in a pension. This is free money, so don’t opt out. In fact, put more in if the company is willing to match or part-match your additional contributions. This is more free money.

Step 4 - Establish a rainy-day fund

In my world, there’s always plenty of discussion around the size of emergency fund that the average person should put aside. I recommend keeping six months' worth of outgoings in a cash ISA, or other tax-efficient, easy access accounts.

Some say hold less because there is an opportunity cost - money tied up in easy-access accounts may earn less than it would with a fixed-rate account or invested - but I believe a six-month cushion is essential to help in those times when things go wrong.

Step 5 - Invest in an ISA

Once your rainy-day fund is established, and you have maximised your pension, consider putting any excess earnings into ISA funds. If you need help selecting funds a good starting point could be our Select 50 list of favourite funds chosen by experts. The easy, low maintenance option is to invest into passive or tracker funds. They aim to replicate the performance of a specific index rather than try to pick investments to beat an index.

If you want to take less risk, consider putting some of your money in bonds. They often move in the opposite direction to equities, smoothing the dips. Portfolios are typically divided between equities and bonds as 60/40, 70/30 or 80/20.

Step 6 - Make a will and set up a lasting power of attorney

The few hundred pounds it costs to get a solicitor to draw up a will is the best money you will every spend. I see too many people who have lost someone and then find themselves faced with needless complexity, and needless tax bills, at a time of extreme stress.

Equally, setting up lasting power of attorney, which enables you to make decisions on health and money for a loved one, is essential for everyone. Don’t wait until you need it. There is no downside to setting one up in your thirties or forties. It is done. A permanent fix.

Step 7 - Take financial advice when you need it 

If any of this confuses you, or leaves you unsure, you should speak to a financial adviser. It is particularly important as you approach and move into retirement, where planning becomes complex, or to minimise inheritance tax liabilities.

Advisers can also be helpful for the rest of your investment journey, especially if you’re prone to selling when markets turn rocky. A study by research firm Dalbar in the US has repeatedly shown individuals achieving worse returns than the market. The 2021 study found that over 30 years an individual achieved an annual return of 7.1% compared to 10.7% for the US market (S&P 500). Please remember past performance is not a reliable indicator of future returns. One reason could be investors buying after a rally and selling after a slump. An adviser can help investors stick to the script.

This plan is not definitive and definitely not bespoke - but it is a start. Its real appeal is that it is simple and quick to implement. And just think of how smug you might feel at finally having a plan in place.

Finally, it’s worth highlighting that our Wealth Management customers (pensions/investment portfolios of £250,000-plus) receive the help of a relationship manager for no extra cost. For those in need of full advice, find out more here.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Select 50 is not a personal recommendation to buy or sell a fund. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.