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Personal finance and the psychology of money

There’s been a lot of bad headlines again recently – Jamie Oliver’s restaurants and British Steel are shedding jobs, Mothercare and other retailers are in trouble… if you’re directly involved (or know someone who is), then this is a very tough time financially.

I don’t pretend to have a silver bullet, but I do know that it’s very easy to get overwhelmed in these kinds of situation. The most important thing you can do? Get clarity.

Come back to the steps of The Money Plan to do that.

Step 1: What’s your outcome?

The worst thing you can do, although it might also be the most natural, is to dwell on the here and now and the bad situation you’re in.

You’ve got to say, ‘this situation doesn’t define me’. What’s happened to you isn’t who you are.

Ask yourself how you want to spend the rest of your life. You may have to take a short-term job just to bring some money in, but at the same time, start planning for the future. Set your vision of where you want to be, and then you can determine what you need to do now to move towards that.

Sometimes when you’re in the thick of the forest, you can’t see the wood for the trees. You’ve got to step back a bit to assess what you really want.

I’ll share my personal outcome: I want to help one million people become financially organised and free. It’s not a commercial thing for me, it’s just how I feel and what I want to be able to look back on when I’m in my 90s in a rocking chair!

For many, the long-term goals are about retirement, helping their kids or buying property. It doesn’t matter what your drivers are, just that you know them. You’ve got to know your ‘why’ or you’ll never really change your situation.

Download my free goalsetting worksheet

Step 2: Get organised

Being financially organised doesn’t have anything to do with how much income you get or how educated you are. Once you’re organised financially, you can broadly forget about it and enjoy life.

The Bank Accounts System is probably the single thing that has the biggest effect for the people I work with. The purpose of it is to automate your spending and take routine thought out of your banking. You can find more details on the system here.

The other thing you must do is save an emergency reserve.

There’s a reason why people who follow me hear me talk so much about the importance of emergency cash. Your emergency reserve is a fund that will weather you through some storms. To begin with, it’s £1,000, which isn’t going to last very long if you lose your income but we start there because some people have never saved that much money in their life.

If financial objectives are too challenging to achieve, then you’ll get demotivated and that’s the opposite of what we want. The £1,000 goal is something that everyone can achieve, I’ve coached many people in different situations and they’ve all done it. Do whatever you can (legally and morally!) to get there, from selling things around the house to taking a second job for a while if you have to.

I prefer to save this money in Premium Bonds (NS&I). It’s NOT an investment, it’s not about the returns – I like Premium Bonds because it keeps the money safe and out of arm’s reach, so you won’t be tempted to spend it if you have a particularly bad or good day.

Step 3: Financial protection

There are eight financial foundations to your House of Wealth, three essential and five optional. We’ve already discussed the first of those, emergency cash, which by this stage you should be looking to build up from £1,000 to between three and six months of your expenditure.

The other two essentials are to make a will and lasting powers of attorney.

Even if you have no assets, please make a basic will and revise it when you do. It will put you in the right mindset for future wealth and avoid any issues for those you leave behind.

Click here to get a will

Lasting powers of attorney are essential for everyone aged 18 or over. They are NOT just for the elderly. You can find out why here.

Click here to organise your LPA

The five optional elements are to do with protecting yourself: life assurance, disability insurance, critical illness cover, private medical insurance and general insurances. These all transfer a risk away from you to someone else; you don’t have to have them, but they can give you peace of mind.

Step 4: Pay down your debt

When you pay off your unsecured debt, you’re more confident and vibrant, and you’re freeing up money you were previously using for your repayments.

The Snowball System is the best way to approach it psychologically. You should be paying yourself 12.5% of your income every month, and if you have unsecured debt you should be aiming to get rid of it as quickly as possible.

Step 5: Investing

When you’re financially secure, it’s time to invest. Take your snowball, which is a minimum of 12.5% of your income, and split it 40/40/20 – that’s 40% on overpaying your mortgage, 40% on your future, your retirement, and 20% for yourself.

Up until step 5 you should have kept everything very lean and tight, and there’s only so long you can do that for. There was a purpose behind it, which was to eliminate your debts, and once that’s done it’s important that you enjoy yourself. You might spend that 20% on training courses, holidays, weekends away… the most successful diets are the ones that people stay on the longest, not the ones that are the strictest, and the same principle is true here too.

You’re looking after your now by overpaying your mortgage and your future by investing. Accumulating wealth takes time, and you’ve got to enjoy the process.

The investor mindset

The other group of people typically monitoring the headlines closely are investors, who might be asking whether the financial climate is changing.

You shouldn’t set your financial situation up for seasons. The economy has seasons, but you need an evergreen mentality when it comes to your investing. That way, you expect pullbacks or retracements, they don’t define your strategy. The right way is to set your ship and weather the storm.

You can’t change your approach every time something occurs. You’ve got to set your course and stick to it.


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