Setting Up for Success

This blog is the first in the finance series to talk through how to carry out the first stage of Retirement Gearing.  This is all about setting up your financial structure to make financial planning easier, while you don’t need to carry out this step it will make the rest of the process a lot easier.

If you decide to go through this process, it is a good opportunity to set up with a new bank and get benefits that are offered.  Generally, people tend to stay with the same bank and never change.  Banks rely on this and so don’t really offer great deals to their customers.  With automated switching it is very easy to change banks and let the banks do all the work and then reap in some free money.  For example, at the time of writing HSBC are offering £175 to switch to their HSBC Advance account, that is £175 for just moving your accounts and they do all the hard work.  There are some conditions to switching but this is just an example of what benefits can be had.

For ease of financial management, I have always separated my bank accounts. I do this to enable me to better track direct debits and standing orders.  It also gives me the ability to have a better understand of where I am spending my money on a day to day basis and how my savings are doing.  I use five types of accounts:

Current Account 1

This is my regular outgoings account; all my income comes in here and all my direct debits and standing orders go out from here.  This gives me a good understanding of what I have to pay to keep a roof over my head, stay warm and be able to post to my blog.

Current Account 2

This is my general spending account; I move money from current account 1 at the start of the month and this pays for my general expenses, such as lunch out, coffees, wine, etc.  I can add extra money when needed but this enables me to track easily what I am spending on a day to day basis.

Current Account 3

My Credit Card account; So, I do have a credit card, however I should state up front that I pay off the outstanding balance every month and ensure that I never get charged on the card.  Having debt on a credit card is the worst way to owe money, the interest rates are shocking and once you get into a cycle of not paying it off it can drown you financially.  At the time the average interest rate for a credit card was 18.2% and on a credit card this is charged on a daily basis.  So why do I have one? Because they give benefits!  At the time of writing I have an Amex Platinum Everyday, this gives me 0.5% cashback on up to £5,000/yr and 1% above this.  This is free money providing that I pay of the balance at the end of each month and this is where the third account comes in.  I don’t spend on the credit card without putting the same amount of money from another account into this one.  This ensures that I am not stretching myself and that I can always pay off the credit card at the end of the month.

Savings Account 1

This is my short-term savings account.  I use this account to save for those items that I want or need in the near or short term, for example that 55” TV that I want for the lounge or our next holiday.  I keep this separate from the main savings as the money is already earmarked for something so I can’t use it in my retirement planning.  Most of the time this money will find its way into Current Account 1 when I use the credit card to purchase the item to ensure that I get cash back on it.

Savings Account 2

Finally, this is my main savings account; this is my “oh crap” account.  I keep enough money in here to cover something catastrophic.  Depending on your lifestyle will depend on how much you keep in this account, however it needs to be a happy balance.  With today’s interest rates paying next to nothing you don’t want to overload this account, however, if the washing machine breaks down over Christmas you want the ability to replace it and not worry about where the money is coming from.

The key point about all of these accounts is that they are working accounts, these are not your future savings for retirement.  I use these accounts to manage my money with the least amount of effort and feed our future savings plan.  Do this right and your planning will be easy, do it wrong and you will make your planning harder than it needs to be.

Remember Retirement is a Journey not a Destination and we want to make that journey as easy as possible.