8 steps to ‘permanently’ fix your finances

Wrestling with financial decisions is a joy. For some. 

For the vast majority, it is a necessary evil that should be endured in January and then thankfully forgotten for another year.

For the financial hobbyist, we have an array of tools to help review your portfolio (the X-ray tool is particularly good), to check markets, select investments and try to see if you’re on target for retirement.

But if you remain unconvinced about being a hobbyist, then I share an alternative route - a plan for a lasting financial fix. But if you are a ‘do it once and walk away’-sort then these steps offer a framework.

Despite the travails of financial issues in 2024 - stubborn inflation, uncertain interest rates direction, etc - this plan remains a constant. 

Reassuringly, I first published this plan in 2005 and over the years I have made only one addition. Having seen close-up the need to have power of attorney in place, I added that as step 2.

To repeat, this is NOT advice but an example of a very basic plan. It’s food for thought. If you are in any doubt, always speak to a Fidelity’s advisers who can answer your questions and tailor a specific plan for you.

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Step 1 - make a will

There are many high-profile examples of individuals who died without a will. Comedian Rik Mayall’s family discovered in 2014 that he had died ‘intestate’ – without a will to protect his £1.2m estate. In such instances, a portion of assets may go straight to children rather than the spouse, triggering a potential tax liability.

For the sake of a couple of hundred pounds, an estate can save thousands and it can make the process less stressful and faster for your loved ones. It’s also worth noting that the recent change to make unspent pension money liable for inheritance tax makes estate planning even more important. 

Step 2 - set up a lasting power of attorney (LPA)

We don’t like to think about death and wills. We also don’t like to think about the infirmity and illness that often precedes it.

Too often an LPA is only created once families understand the need for it - once a loved one is too ill to make their own financial decisions. The reality in England & Wales is that your husband, wife or children have no legal right to manage your affairs if you can’t.

The government has recently introduced digital LPAs. The process - paper or digital - costs £82 for property and financial LPA and the same for health and care powers.

Step 3 - pay off credit cards and loans

Clear them, then close the accounts. This is the most expensive debt for most of us. Even 0% deals can end up being costly for the unvigilant. They will eventually revert to a high standard rate at the end of the interest-free period, or sooner if you miss a payment. Average credit card rates remain belligerently high. Latest Bank of England data shows they only edged down from 21.7% to 21.5% in 2024. That is extremely costly debt.

Step 4 - the life insurance question

If you have dependants, you may want to consider taking out term life insurance. As the title suggests, this covers a fixed number of years and the monthly payments remain fixed throughout the term. Some people run it well into retirement but others minimise the cost by covering the length of their mortgage.

Don’t forget to check first whether you have life cover through your work benefits.

Step 5 - maximise your pensions

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.

Across your pensions, you can normally pay in up to a maximum of £60,000 although this is reduced for higher earners - those on more than £260,000 a year. Our retirement guides have have more detail on the rules.

Step 6 - build a rainy day fund

Having a rainy day pot is essential. This could be to cover costs of a car breakdown or a leaky roof but it may also be needed if you lose your job. Understandably, the majority of UK workers say being financially prepared for an emergency is a primary goal, but only 42% are confident they can achieve it, according to the most recent Fidelity Global Sentiment Survey.¹

Start by aiming to have £1,000 saved. Then you can build up to saving the equivalent of one month’s income. You should eventually aim to have the equivalent of three to six month's take-home income.

Step 7 - long-term savings 

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 8 - take financial advice when you need it

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

You may have a need for advice sooner, such as planning for school or university fees. 

Advisers come at a cost, of course. But they can also be particularly helpful for those who struggle to stick to a financial plan. A study² by research firm Dalbar in the US has repeatedly shown individuals achieving worse returns than the market. The 2022 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). One of the causes could be individuals falling prey to the behavioural foible of buying after a rally and selling after a slump. An adviser can help investors stick to their financial goals.

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Source:
¹ Fidelity Global Sentiment Survey 2024

2 Dalbar QAIB 2022 Study

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. 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.