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Budgeting and managing your finances (what I've learnt so far)

Updated: Sep 9, 2021

Taking a gap year is your first break from full-time education! It's a time to gain some independence, figure out what you want to do with your life and formulate a plan of how to get there, whilst exploring what the world has to offer you.

During my gap year, one of my biggest goals was to become more independent and this included: getting a job, saving up some money, learning how to drive and hopefully, buying my first car.

After finishing my A-level exams, I worked part-time during the summer as a waitress so I managed to save a few hundred. Then, I got a job as a healthcare assistant in October 2016. It was my first full-time job where I was earning a proper salary. I managed to save 5 figures during my gap year and have been trying to continue to grow this number throughout university. In order to manage my finances and save up this money, this is what I did and things I hope to do to maximise my savings and become more financial literate in future (it's an on-going journey).

1. Open a savings account (if you do not already have one)

This is a great site that gives you an overview of how to open a savings account and what it is. It’s generally wise to have a savings account to keep money in a safe place that you don’t plan to spend in the immediate future. A savings account can also be a means of setting aside funds to reach longer-term goals such as buying your first car or house. If you don't have a savings account, open one NOW! In addition, you may also want to open an ISA (discussed below).

2. Download your banking apps

Make sure you're aware of who you bank with (find it on your debit card) and download the necessary apps so you can keep track of your finances at all times. I check my banking apps AT LEAST once a week. If you do not know what's coming in or out of your account, how can you even begin to budget/manage your finances?! Too many of us do not bother to check these things and it is important that you do.

3. Read your bank statements and file them away

Similar to point 2, READ your bank statements and make sure you are aware of your opening and closing balances each month. Although lots of banks provide online statements these days, I still think it is important to receive a paper copy at least once every 3 months (you can switch between your bank's paper and paperless settings on your app/online account/by phone). It is important to have a paper copy because when you get job offers, they often ask for proof of address and this counts as one - as well as this, it is good to have a paper copy of your financial information to file away and look at in detail to catch any over-spending/ damaging financial habits you may have.

4. Consider getting a Monzo card

Monzo cards have great benefits, especially for students. You can link it to your current UK bank account and deposit money into it each month really easily. I use it as a travel card and for my leisurely spending. Monzo sends you instant notifications on your spending and saving and even helpfully categorises it i.e. You can see a breakdown of what you spend on groceries, transport, leisure activities, etc. This makes it so much easier to spot where you are over-spending. They also make it easier to split bills with friends as you can 'Monzo' one another money, much like PayPal.

5. Try to save some of your salary each month

I was intent on saving up as much money as I could during my gap year so I transferred half of my full-time wage each month to my savings account. This left me with a significantly smaller amount of money to work with throughout that month which ensured that I stayed within my means. I luckily did not have rent to pay (as I lived with my parents), but I spread this money between necessities such as food, socialising, travel expenses, etc. If you have more financial responsibilities such as rent or car payments, then try to save as much of your salary as you have left (e.g. aim for ~ 30%). You will be surprised by how much money you end up saving over just a few months!

6. Invest

This is not something I necessarily did in my gap year but I decided to invest a portion of my savings during COVID-19 due to terrible interest rates on savings accounts. There are lots of videos on where to start investing. Ali Abdaal's video was probably favourite and easiest to understand. Investing your money yields much greater profits than you will ever get from accruing interest on your savings account, which means your money is losing value as the years go on. By investing, you are ensuring your money is working for you by depositing it in real-value stocks. I use Freetrade app (sign up using this link to get a free stock) and I personally invest in low-risk stocks such as Apple, Netflix etc., as I aim to hold my money in these stocks for years. I have a couple of higher risk investments, but I do so with caution. By selling stocks, you can take advantage of the profits by either withdrawing them into your bank account or buying more stocks.

7. Have a wish-list

This can help you keep the things that you really want in one place and purchase them when you have the funds. You may really want to buy that bag you've been looking at but you know it will be a dent in your finances. So, instead, add it to your wish list! You will also notice that whilst it's on there and you don't look at it too often, you may no longer want or need it. This is good because you can update and delete items too. Most shopping sites have wish lists built into them - use them.

8. Apply for a credit card (if you are financially stable and sensible)

Having a credit card is the easiest way to start building up your credit score at a younger age. Many people get confused with a credit card and what it actually means so I'll attempt to explain below.

Credit vs. Debit

Your Debit card holds the money you ACTUALLY have. This is what you would call your 'current account' and when you become a university student, this changes to a student account because you often get given an overdraft (the bank will loan you a certain amount of money if you have overspent, but you will NEED to pay this back after a deadline before you start accruing interest/debt that you will also owe back to the bank). This is a really handy student blog on what a student account is and what you should look for when switching to one once you start university.

A Credit card holds money that you DON'T have. This is the bank's money. Therefore, anything you spend on a credit card is not your money and you MUST pay it back each month, otherwise, interest will be applied = more to pay back = debt!

So what's the point of a credit card then?

Well, first, you need to educate yourself on your Credit Score. I use ClearScore to tell me what my credit score is each month, what I am doing well, and what I can do to improve it. They explain what a credit score is and how to ensure you have a good one here.

Your credit score acts as a 'financial CV' when applying for things like a mortgage, getting a car on finance, or getting loans from banks. It is your detailed financial history - have you been on time with payments? How many accounts do you have? Are you financially stable? Lenders and organisations will use your credit score to answer these questions and decide whether to give you money or not.

Having a credit card shows lenders that you can spend money that is not yours and pay it back on time. It also demonstrates that you know not to spend outside of your means and are financially sensible. Credit cards often hold thousands of £s (e.g. I can spend up to £5000 on just one of my credit cards). Many people would be tempted to spend this all at once - without remembering that they have to pay every penny back within a deadline. This is why credit cards can be risky for young people who are not yet sensible with their spending or financially literate - you could easily blow that money on fancy holidays and Louis Vuitton bags, especially when you own more than 1 credit card. However, when you use a credit card sensibly, you can truly reap the benefits! I tend to use one of my credit cards to book holidays (and pay them back later), my other for retail spending, and another for when I am in a different country (as it does not charge me exchange rate fees). I use my debit card for groceries, travel, and key necessities. Since I get paid from my jobs into this account, I take some of this money to put into savings too.

Paying off your own phone bill, owning a car, and paying it off on finance and other regular payments also elevate your credit score. A credit card is just an easier way to boost it as a first step to becoming more financially literate.

9. Open up an ISA

An ISA is an Individual Savings Account. This is different from a savings account because any interest that you accrue on the money that you put into your ISA is tax-free. In a savings account, the interest is taxed, so as you put your money in any interest you get on top of that is subject to income tax. Opening up an ISA, therefore, means you can maximise your savings. I have yet to open up one (COVID-19 got in the way) but it is something I am in the process of doing.

There are different types of ISAs so you must research each one (e.g. some can charge you a hefty penalty fee if you try and withdraw your money, whilst others MUST solely be used to buy your first property).

This site provides information on what an ISA is and a table of the different types of ISAs. However, make sure to always double-check what the terms and conditions are with the bank you choose to go for. I tend to go for the bank that gives the highest interest rates so I can accrue as much money on my savings as possible but also have quite flexible terms and conditions (i.e. low withdrawal penalties, good customer service).

I hope this blog post provided some guidance on maximising your savings during your gap year, throughout university, and beyond. Please comment below or share your own methods, thoughts, and ideas about how young people can become more financially literate and manage their finances better.

P.S. Unfortunately, financial literacy is not something taught in-depth (if, at all) in schools which I really think it should be. Petitions have been signed and this had been debated in Parliament (transcript can be found here) which declared that "Personal, Social, Health and Economic (PSHE) education is the framework within which schools should be teaching young people about personal financial management". I personally didn't learn anything about finances during my PSHE lessons but I have linked some useful resources below.

Useful resources: