Financial steps you need to take... but probably won't

There are five vital steps we all need to take - but most won't

BEAWA3 Worried woman holding bills and looking at laptop

We all have our financial blind spots. We know that we need to sort out these areas of our financial life, and that if we don't do anything now, we will be storing up serious financial problems for the future. And yet, these things remain neglected. So why are they not making it off the to-do list, and what does it mean for you?

1. Balance your budget

It's the basic fundamental underpinning your financial life: you need to ensure that you have more money coming in that you do going out each month. You also need to divide that cash effectively, so you can achieve all the things that you need with it. The only way we can be sure to do that is to draw up a budget, so why do less than a third of people bother?

There are two reasons for this. The first is that we don't think it's possible. It's true that the first time most people draw up a budget, they are left with a shortfall - it's precisely the reason we do it in the first place. However, that's not the end of the process: we need to revisit the figures to see were we can reduce costs or increase our income, so we can find a way to get back on track.

The second - and perhaps more pressing - reason is that it's boring. The process means digging out bills and looking through bank statements to work out exactly what we have been spending on the essentials. Then we need to track down an online budget tool and feed in all the details. No-one can make this process as much fun as ignoring it and watching TV instead - but try to think of the consequences of neglecting it.

Without a budget, we overspend; we don't have the money for the essentials; and we spend each month trying so hard to make ends meet that we never think of the more long-term things like a pension, a holiday, or what we are gong to do when the car finally gives up the ghost. Simple overspending (or using debt to close the gap) is the main reason why almost one in five people with serious debt problems got into debt in the first place. Meanwhile, the failure to budget and therefore plan for the future is the reason why the other four in five get into debt.

2. Shop around

We know that our ability to shop around is the one thing keeping us from being ripped off. We also know that on a regular basis we ought to be checking the market for better savings or credit cards, media solutions and gas and electricity providers. And when our current deal expires we need to check for home insurance, car insurance, and mobile phone deals. And yet so many of us don't. Around a third of people automatically roll over their insurance, while half of people never switch electricity or gas provider.

There is one over-riding reason for this - we can't be bothered. It seems a lot of bother to dig out all our details in order to enter them into a comparison site. We may need to make phone calls to ask about our specific situation, and then we may need to send off some paperwork. That's even before we get the documents in and have to trawl trough the fine print. And of course once we've gone to all this bother, we know we have to go through it all again in a few months' time. It's no wonder it seems far easier to stick with the company we know.

The problem is that we're wasting almost £1,000 a year in the process. Cheaper gas and electricity alone could save us £200, while cheaper car insurance can save £220, and cheaper home insurance can save £70. A cheaper and more suitable phone package could save £200 a year, while a more cost-effective media package can save £200. The process is likely to take anything up to five hours to compare it all - but isn't £1,000 worth five hours of your time?

3. Make a will

Around 60% of all people in the UK haven't got around to drawing up a will - including a quarter of all people who are over 65. The Co-operative recently looked into why this was and found that for 41% of people it was simply a case of not having got around to it. A quarter, meanwhile didn't think they had enough to leave, a fifth thought they were too young, and one in ten didn't want to write a will because it would make them think about death.

All of these reasons are understandable, but the consequences are horrifying, because without anyone being aware of your wishes, your estate is handed out according to strict rules. If you are married then your spouse will receive the first £250,000 and all of your personal belongings. They will also have 50% of the rest - and your children, grandchildren and great-grandchildren share what is leftover. If you don't have any children, then your spouse will receive everything. However, if you are living with your partner but are unmarried, then without a will they will be entitled to nothing from your estate.

There is no chance for you to leave sentimental items to individuals, or to give anything of value to anyone beyond your immediate family. You cannot make any plans to reduce the inheritance tax due on your estate, and in some circumstances your other half could be forced to sell the property you lived in together in order to divide the estate.

4. Save for retirement

Almost 40% of people have made absolutely no plans for their finances in retirement: they have saved nothing, and don't plan to save anything either. The reasons why are perfectly understandable: Aegon research recently found that a quarter of people are putting aside everything they can afford - they just don't have the ready disposable cash to make more provision for the future.

Then you can add in the fact that most people feel bamboozled by pensions, and that retirement tends to feel so far off that people put off thinking about it until it's too late to build up a decent savings pot. It's a wonder that anyone is saving enough at all.

However, the consequences of failing to save for retirement are as horrible as they are predictable. At the moment, only one in ten men and one in 20 women are saving enough for the kind of retirement they expect. The figures from Aegon show that on average men will receive £35,000 less every year than they would like and women will get £12,665 less than they say they need. The position for women is particularly worrying because this means most women can expect to live off around £11,000 in retirement - roughly half what they say they need.

The solution isn't simple. It's worth using a pensions calculator to see what you should be contributing each month for the retirement you want. However, if this figure is beyond your reach, don't panic yourself into doing nothing. Start with a smaller sum that you know you can afford, then after six months revisit this to see how much more you can contribute. If you repeat this process for a few years, you can build up a reasonable monthly contribution and become one of the small minority of people who can retire with the kind of pension they were hoping for.

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5. Invest for the long term

Around two thirds of people currently have some money put aside for the future. This is essential if we are to stop unexpected expenses tipping us into a financial crisis each time they crop up. However, while having an emergency fund that's easily accessible is important, millions of people leave everything they save in instant access savings - where the vast majority of accounts are actually losing money once you take inflation into consideration.

The alternative is to put money into some form of investment, where as long as you have a time horizon of ten years or longer, your money has the potential to grow far more. A Barclays study earlier this year found that if you had put away £1,000 for a year into shares you would have made 17% after inflation (compared to losing 2% in cash). This was a fairly exceptional year. However, over ten years you would still have made 5% a year in equities compared with losing 0.5% a year in cash. This growth isn't guaranteed, but the potential is clear.

There are three reasons why people don't do this. The first is that locking up money for the foreseeable future is a frightening prospect, and they are concerned that if their circumstances change they will need to get their hands on their money. The second is that they don't know enough about investments to be confident in making the right choice, and the third is that they are worried about shares in general, and the potential for their investment to lose money.

If you are genuinely concerned that you may need the money imminently, then investments may indeed be wrong for you, but you need to think very carefully if it's the risk or a lack of understanding putting you off. If you visit a financial adviser, they can work out the level of risk you should be taking in your personal circumstances, they can then help you match that level of risk to the kind of investment that suits you. It's vital that they explain the investment so you clearly understand where your money is going, but you don't need to go it alone.

It's safe to say that none of these five steps are simple. Some require time and effort, others need expert help. All of them are worth investing time and money in, because they will make an enormous difference to your future. The question is whether we will put the effort in or face the consequences.

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