Personal Finance For Dummies, UK Edition

Hannah Smith is an award-winning freelance financial journalist with 20 years’ experience writing about money. She has written and produced for a wide range of financial publications including The Times, The Daily Telegraph, and the BBC. Eric Tyson, MBA, is the author of bestselling For Dummies titles such as Personal Finance For Dummies, Investing For Dummies, and Financial Security For Dummies.

• Introduction 1About This Book 2Foolish Assumptions 3Icons Used in This Book 3Beyond the Book 4Where to Go from Here 4Part 1: Getting Started with Personal Finance 5Chapter 1: Embracing Financial Literacy 7Understanding Everything Financial Literacy Includes 8Starting with the basics: Budgeting and transaction accounts 9Making your money work for you: Investing 9Protecting your income and assets: Insurance 9Talking Money at Home 10Identifying Unreliable Sources of Information 11Understanding the dangers of free financial content online 11Recognising the dangers of following financial gurus (and celebrities) 12Publishers pandering to advertisers 13Developing Good Financial Habits 14Chapter 2: Establishing a Financial Foundation 15Understanding Your Cash Flow 16Uncovering where your money goes 16Sizing up your income 17Using Different Accounts 18Current accounts 19Savings accounts 20Investment accounts 21Budgeting to Boost Your Savings 22Understanding and Improving Your Credit Score 23Deciphering how lenders use credit reports and scores 23Obtaining your credit reports 24Chapter 3: Establishing and Achieving Goals 27Creating Your Own Definition of Wealth 28Acknowledging what money can’t buy 28Managing the balancing act 29Prioritising Your Savings Goals 30Knowing what’s most important to you 31Valuing pensions 31Building Emergency Reserves 33Saving to Buy a Home or Business 34Funding Kids’ Educational Expenses 34Saving for Big Purchases 35Preparing for Planned Borrowing 35Preparing for Retirement/Financial Independence 36Figuring out what you need for retirement/financial independence 38Understanding retirement building blocks 39Crunching numbers for your retirement 42Making up for lost time 43Part 2: Spending Less, Saving More 45Chapter 4: Managing Where Your Money Goes 47Examining Overspending 48Having access to credit 48Misusing credit cards 49Taking out car loans 49Spending to feel good 50Assessing Your Spending 52Tracking spending the “low-tech” way 52Tracking your spending on websites and apps 55Chapter 5: Reducing Your Spending 57The Keys to Successful Spending 57Living within your means 58Looking for the best value 58Making credit cards work for you when you’re shopping 60Avoiding rent-to-own 60Smarter Spending 61Managing food costs 62Saving on shelter 64Cutting transportation costs 66Lowering your energy costs 68Controlling clothing costs 69Repaying your debt 70Making space for fun and recreation 70Lowering your phone bills 71Curtailing personal-care costs 72Chapter 6: Understanding Types of Borrowing 75Choosing Carefully When You Really Must Borrow 76Knowing why people typically borrow 76Making sure you have a plan to repay 77Understanding why debt consolidation is usually bad news 77Exploring Types of Borrowing 78Credit cards 79Buy now, pay later 80Secured versus unsecured loans 81Overdrafts 82Payday loans and why you should avoid them 82Cost comparison for borrowing options 83Chapter 7: Dealing with Debt 85Using Savings to Reduce Your Consumer Debt 86Understanding how you gain 86Debt snowball or debt avalanche? 87Decreasing Debt When You Lack Savings 87Reducing your credit card’s interest rate 87Understanding credit-card terms and conditions 88Cutting up your credit cards 89Paying off student loans 90Exploring Solutions to Debt Problems 91Sorting it yourself 91Understanding debt management plans (DMPs) 92Understanding Debt Relief Orders (DROs) 93Understanding Individual Voluntary Arrangements (IVAs) 93Declaring bankruptcy 94Comparing debt solutions 95Finding Reputable and Free Sources of Debt Support 97Stopping the Spending/Consumer Debt Cycle 97Resisting the credit temptation 98Identifying and treating a compulsion 99Chapter 8: Maximising Your Savings 101Working Out How Much to Save 102Regular savings versus lump sums 102Earning the most interest possible 102Saving for Short-Term Goals 103Saving for Longer-Term Goals 104Understanding How Inflation Eats Your Savings 105Saver Mike’s inflation battle 105Paying tax on your savings 106Making the most of ISAs 107Part 3: Building Wealth Through Investing 109Chapter 9: Managing and Reducing Your Tax 111Understanding the Tax You Pay 112Focusing on your total tax 112Recognising the importance of your marginal tax rate 113Understanding the 60 percent tax trap 114Defining taxable income 114Analysing recent tax law changes 115Making the Most of Your Tax-Free Allowances 116Paying into a pension 117Deducting self-employment expenses 117Salary sacrifice schemes 119Contributing to charities 119Tax-Friendly Investing 120Using ISAs to save and invest tax free 120Dividend, savings, and capital gains tax allowances 121Backing young companies for tax breaks with EIS and VCTs 122Estate Planning 122Managing inheritance tax 122Wills, living wills, and powers of attorney 124Where to Go for Help with Tax 125Obtaining HMRC assistance 125Finding an accountant 126Deciding whether you need a financial adviser 126Looking for tax resources online 126Dealing with a Tax Investigation 127Chapter 10: Considering Important Investment Concepts 129Establishing Your Goals 129Understanding the Primary Investments 130Looking at lending investments 130Exploring ownership investments 132Shunning Gambling and “Get-Rich-Quick” Vehicles 132Forsaking futures, options, and other derivatives 132Ditching day trading 133Sidestepping get-rich-quick schemes 134Understanding Investment Returns 134Sizing Investment Risks 135Comparing the risks of stocks and bonds 136Focusing on the risks you can control 137Discovering low-risk, high-return investments 138Diversifying Your Investments 138Spreading the wealth: Asset allocation 139Allocating money for the long term 140Sticking with your allocations: Don’t trade 141Investing lump sums via pound cost averaging 142Leaving You with Some Final Advice 143Chapter 11: Understanding Your Investment Choices 145Slow and Steady Investment: Bonds 145Building Wealth with Ownership Vehicles 147Selecting stocks 147Investing in individual stocks 148Investing internationally in stocks 149Owning shares in your employer 150Investing in funds 150Generating wealth with property 152Investing in small business 156Off the Beaten Path: Investment Odds and Ends 159Precious metals 159Bitcoin, Ethereum, and other cryptocurrencies 160Collectibles (including NFTs) 162Peer-to-peer lending and crowdfunding 163Avoiding scams 163Chapter 12: Investing in Funds 165Understanding the Benefits of Funds and ETFs 165Exploring Various Fund Types 167Fund structures 167Bond funds 168Equity funds 169Mixing bonds and equities: Balanced funds 170Global funds 170Index funds 171Specialty (sector) funds 172Socially responsible and ESG investing 173Learning How to Invest in Funds 174Online investment platforms 174Apps 174Stockbrokers 174Financial advisers 175Choosing a Managed Portfolio or Going DIY 175Selecting the Best Funds 176Understanding fund literature 176Keeping costs low 177Adding up how much investing costs 177Evaluating historic performance 179Determining your needs and goals 179Deciphering Your Fund’s Performance 180Dividends 180Share price changes 181Evaluating and selling your funds 181Chapter 13: Investing for Retirement 183Why Invest in Pensions 183Free money from the government 184Free money from your employer 184Are pensions safe? 185Looking at Types of Pensions 185Workplace pensions 185Self-employed pensions 186Defined contribution pensions 187Defined benefit pensions 187How much money do I need? 187Understanding the State Pension 187Plugging gaps in your National Insurance record 188Annuities explained 188Allocating Your Money in Pensions 189Prioritising pension contributions 190Setting up a pension 190Allocating money when your employer selects the investment options 190Allocating money in plans you design 192Transferring Pensions 194Consolidating small pension pots 195Moving money from an employer’s plan 195Taking money out of pensions 195Understanding drawdown 196Exploring pension alternatives 197Chapter 14: Investing for Children 199Investing for Children versus Saving in Cash 199Exploring Ways to Invest for Children 200Understanding Junior ISAs and Child Trust Funds 201Deciding whether to invest for a child through your own ISA 201Considering pensions for children 202Estimating University Costs 204Working Out the Student Finance System 205Strategising to Pay for Educational Expenses 206Estimating university costs 206Setting realistic savings goals 207Tips for getting loans, grants, and scholarships 207Chapter 15: Investing in Property: Your Home and Beyond 209Deciding Whether to Buy or Rent 210Assessing your timeline 210Determining what you can afford 210Calculating how much you can borrow 211Comparing owning versus renting costs 212Considering the long-term costs of renting 213Recognising advantages to renting 214Financing Your Home 214Understanding the two major types of mortgage 215Choosing between fixed- and variable-rate mortgages 216How willing and able are you to take on financial risk? 216Avoiding the house deposit blues 217Considering a 30- to 40-year mortgage 219Deciding whether to overpay your mortgage 219Finding the best lender 220Increasing your approval chances 222Finding the Right Property 223Casting a broad net 223Finding out actual sale prices 224Researching the area 224Working with estate agents 224Presenting yourself as a serious buyer 225Making an Offer 225Negotiating 101 226Getting a survey 226Appointing a conveyancer 227Planning for stamp duty and other costs 228After Your Purchase 228Remortgaging 228Considering equity release 229Selling your house 229Chapter 16: Working with Financial Planners 231Surveying Your Financial Management Options 231Doing nothing 232Doing it yourself 232Hiring financial help 232Deciding Whether to Hire a Financial Planner 234How a good financial adviser can help 235Why advisers aren’t for everyone 236Finding a Good Financial Planner 236Soliciting personal referrals 237Seeking advisers through associations 237Interviewing Financial Advisers: Asking the Right Questions 238How and what do you charge? 238Do you also perform tax or legal services? 238What work and educational experience qualifies you to be a financial planner? 239Can you provide references from clients with needs similar to mine? 239Will you provide specific strategies and product recommendations that I can implement on my own if I choose? 240Learning from Others’ Mistakes 240Part 4: Insurance: Protecting What You Have 241Chapter 17: The Three Laws of Buying Insurance 243Law I: Insure for the Big Stuff; Don’t Sweat the Small Stuff 244Buy insurance to cover financial catastrophes 244Take the highest excess you can afford 246Avoid small-potato policies 246Law II: Buy Broad Coverage 248Law III: Shop Around and Buy Direct 250Finding policies with comparison sites 250Using insurance brokers or financial advisers 250Looking at employer and other group plans 251Dealing with Insurance Problems 251Knowing what to do if you’re denied cover 251Getting your due on claims 253Chapter 18: Insurance on You: Life, Income, and Health 257Providing for Your Loved Ones: Life Insurance 258Determining how much life insurance to buy 258Comparing the types of life insurance 260Buying term insurance 261Preparing for the Unpredictable: Income Protection Insurance 263Understanding income protection insurance 263Getting to grips with critical illness cover 264Deciding whether you need cover 265Determining how much cover you need 266Identifying other features you need in income protection insurance 266Deciding where to buy income protection insurance 267Getting the Care You Need: Health Insurance 267Choosing the best health plan 268Buying health insurance 269Chapter 19: Covering Your Assets 271Insuring Your Home 271Buildings insurance: The cost to rebuild 272Special discounts 272Contents insurance: For your things 273Personal liability insurance: Cover for when others are harmed 274The excess: Your cost with a claim 274Buying buildings and contents insurance 274Car Insurance 101 275Third-party only 275Third-party, fire, and theft 275Fully comprehensive 276Uninsured driver cover 276Insuring Your Pets 277The main types of pet insurance policy 277Ways to save on pet insurance 278Part 5: the Part of Tens 279Chapter 20: Survival Guide for Ten Life Changes 281Starting Out: Your First Job 282Changing Jobs or Careers 283Getting Married 285Buying a Home 286Having Children 287Starting a Small Business 289Caring for Ageing Parents 290Divorcing 291Receiving a Windfall 293Retiring 294Chapter 21: Ten Free Resources 297MoneyHelper 297Pension Wise 298Citizens Advice 298FCA ScamSmart 298Gov.UK 298StepChange 299MoneySavingExpert 299The Open University 299Which? 300Boring Money 300Glossary 301Index 311