A Little Bit Richer

Kia: Hey, this is Kia. New year, new you? From Dry January to New Year's resolutions, this is a time of year where many of us decide to cut down or cut back on something. But, what about a plan to have more money in the future? Make 2025 the year that you take a look at getting your long- term finances in a good place. Savings, investments, money, your pension, et cetera.

Welcome to another episode of A Little Bit Richer, brought to you by my friends at Legal & General. In this episode, we're going to help you make some positive steps that future you will really thank you for. Today we're welcoming Sean who works at Legal & General. He leads a team who focus on supporting people to understand the value of longer- term financial planning, offering web tools and content, and working with telephone advisors. So he's here to give some suggestions and actions, help you get your longer- term finances in better shape. Welcome, Sean.

Sean: So good to be here.

Kia: Happy to have you here. And I'm really excited to get into this episode. So Sean, we all know that we should rein in our spending, more so once the new year arrives. But, what do you need to do if you're thinking longer term?

Sean: So I think if you're thinking longer term, you've really got to be thinking about the goals that you want to set for yourself. And we think about them a lot when it comes to our health and our fitness and we make all these great new resolutions. We also think about what our goals might be from a career perspective. We might be thinking about what we're going to do from a family perspective as well.

But, I think outside of really, really big things like saving for a house deposit, we don't tend to think so much about money and talking about financial goals. And I think one of the reasons for that is that ultimately finances are a means to an end, and sometimes people don't really think about the end itself and what that means for them.

So I think what I'd probably encourage people to do is think a little bit more holistically about what it is that you're really focused on and what you want to achieve. If you're somebody who is really family orientated, then money might be a means to provide for your family, provide security and stability. And if you're focusing on that as the end goal and creating this secure environment for your family, then having something like an emergency savings fund might be an important goal for the year.

But equally, one of the things is not to feel that you are failing if you make some decisions that don't immediately progress to that savings fund goal, because you've also got to think about your own health and your own emotional wellbeing. So sometimes the right decision might be to actually spend a bit of money and time on yourself as well.

Kia: No. I agree. I think it is important to have that balance and to almost keep you on track. And you mentioned one of my favourite words there, " goals," because I love having goals. I was talking to a friend recently about their goals for 2025, because we're here, we're trying to plan for the future. And one word that stuck out to me was her talking about her sacrifice. So the things that she'd have to go without in order to achieve her financial goals.

And when you're talking about sacrificing to achieve something longer term, it can really be hard to stay motivated, because it can feel so long and so far away. And like you mentioned, it can almost feel like it's not really making a dent or an impact. So do you have some suggestions for us on how we can maintain that focus on this journey?

Sean: So " sacrifices" is a really interesting word, and I think actually I'd encourage people to think of them less about sacrifices and more of badges of honour. I'm not going to sit here and start talking about how everyone needs to cut back on the amount of lattes that they buy, or stop eating so many avocados. But, I do think there's certain things that we probably spend money on that would benefit from a bit of a rethink. So lots of people get stuck into this habitual cycle of continuing to pay for the newest mobile phones.

Or they're paying for cars that maybe are higher specs than they maybe need. Or they've got their satellite TV packages. I'm not saying you have to give them up, but I would suggest that one of the things that you could look at is, particularly around a mobile phone, is do you need to continually be paying for the absolute top- of- the- range model?

A lot of people, they've finished paying off one version of the phone. Oh. Lo and behold, there's a brand new one just coming out around the corner. " Oh, I'll get that one as well." So you end up in this cycle of continuing to pay for the phone, when actually if you just didn't do that, rather than upgrading every 18 months, you're upgrading it every three years or so, every time you look at that phone ... Okay.

It might be a little bit battered now, it might be a little bit bruised, but it's still going to be good. It's still going to be a perfectly fine phone. Every time you look at it, it's not about seeing a sacrifice, it's about seeing it as a badge of honour. " Yeah. I have made the positive decision to not invest in this because I want to put that money into something else."

Kia: Sean, I feel seen. My phone is battered and bruised, but I'm going to tell everyone that those scratches and dents are just badges of honour. Thank you.

Sean: Absolutely.

Kia: You've helped me reframe my thinking and everyone else around me is coming for me in my phone. Thank you. Because I've got a four, five- year- old phone and I'm proud of it.

Sean: There's some really interesting work that's been done by this fantastic economist called Richard Thaler on the whole concept of how pensions work. And we know that pensions are really important and that we should be saving everything that we can into them to secure our long- term future. But, I think one of the things that he's observed is that from a human psychology perspective, actually a lot of the way that they're currently set up, it really reinforces this feeling that you're having to give up something now, or sacrifice something now, for something later on. And that is something that we are not really actually set up to do particularly well as humans. And most people would actually much rather have £ 100 right now, than potentially 200, 300, £400 in 30 or 40 years' time.

And if you could ask someone to give up that £ 100 now for something that might happen in the future, they don't like that. And it's called loss aversion. It's one of the key psychological biases. So what Richard Thaler was really looking at in the work that he's been doing is, how can you reverse that?

Because that is one of the real reasons at the moment that people probably don't contribute as much as they should do into their pensions, is this whole concept of loss aversion. But, what he is suggesting is that actually you can turn that on its head a little bit and make that psychological bias work for you through the concept of saying, " Well, don't give up something now, because you don't want to feel a little bit poorer in the short term. Actually, the opportunity that you've really, got is the next time that you have a pay rise or your salary increases ..."

And I appreciate that isn't going to be for everyone. Very great if that's happened for you, and it's lucky that you're in that circumstance.

But, that's probably the opportunity where you increase your contributions for your pension. And the thinking behind it is really interesting, is that you might look at your finances and you might look at what you're contributing to your pensions and say, " I know I need to add more to this, but I really can't afford to lose that right now in my pay packet." But if you wait until you get a pay rise, then you are going to get more money into your pay packet on a monthly basis anyway. Brilliant! So you're going to feel that.

But, if you also use that as the opportunity to increase your contributions by maybe a percentage or two, if you can afford it, then you're getting the best of both worlds, because you're getting more into your pay packet now. Nice big reward for the work that you've done. And you've got your salary increase. Fantastic! But also it is working twice as hard, because you're now putting a bit more into your pension.

Kia: I think that's a great way to look at it, because quite often if you are able to get a pay rise, like you said, you get some sort of bonus from work ... Especially when I speak to people, there's always that want to maybe increase their lifestyle costs. So you might say, " Oh. I've got a bit more. I can afford more now. I can take up more subscriptions, or I can just spend more on my everyday life." But, what you just described there is a great way to actually maybe implement that increase.

So instead of increasing your lifestyle, because you can probably afford it at the point that you're at. Right? You're probably somewhat comfortable. So instead of increasing and spending more, you can put that extra payment, or put a chunk of it into your pension, or maybe another way to plan for longer time. So I love that. That's a good way to change your thinking.

We've spoken about on the show before, the importance of having emergency funding. You mentioned it in the first question today. So I want to come back to that topic and say, do you have some thoughts on what you need, or how we can build up this emergency fund?

Sean: Yeah. Yeah. Absolutely. The first question that people often ask is, " Well, how much should an emergency fund be?" And I think the general rule of thumb is that you're probably looking at about three months' salary or three months' income after tax, just to give you that buffer and that protection in the event that something unexpected happens and you need to dip into it.

Now, interestingly, for some people, that's probably going to equate to not far off about £ 5, 000. And I say that's interesting, because actually, if you think about where we are in the new year, and a lot of people thinking about their fitness and diet and health and getting into maybe a sport or something, the Couch to 5K programme to get people fit has been phenomenally successful and something that a lot of people are really massively benefiting from, getting healthy and getting physically fit.

Well, that 5K actually translates to probably how much you could do with having in an emergency savings fund. So there's almost a bit of a call to arms to say, " Well, okay. You've got Couch to 5K from a health perspective. We should also be looking at a couch to 5K in savings from a financially fit perspective." So I'd say that's probably where you want to start, is that taking a lot of the learnings from what really works from that program and starting applying it to your own savings habits.

Kia: Absolutely. And I think the good thing about the Couch to 5K ... I've never personally done it, but I commend everyone who does do it. But the great thing about that is that it breaks it down into small chunks. So instead of telling someone to save £ 5, 000 is whoa! Overwhelming. But, if you know that it's incremental over a number of days, weeks, months, and then you can get to that final goal, it feels more achievable, which I think that's a great way to implement that into your savings.

And that's definitely how I approach savings and whenever I talk to people. Just to do it bit by bit. If you have a bigger goal of, I don't know, like I said 5, 000, £10,000 pounds, what is that on a weekly basis, monthly? And then it feels like, " Oh, actually, I can save that and I can reach that goal."

Sean: Yeah. Absolutely. It's really motivating. And I think that's really important as part of that whole program, and that's why that actually does work so well, is that you are constantly reflecting on your progress and how well you've done. And that in itself is something that gives you the happy endorphins, that means, " Yeah. I am doing the right thing. I'm getting there.

I'm reaching my goal." If you go down a slightly different path and you spend your money on something different one week, or one month, and you haven't put quite as much into your savings, that's okay. These things happen. But, the important thing is that you've got this plan that you're constantly working towards and you're continuing to see progress.

Kia: Absolutely, Sean. You've done it. Now everyone listening, we're going to do the Couch to 5K financial edition. I love that. And when we're talking about emergency funds, where can we keep our emergency fund?

Sean: Unlike a pension, we want to be able to actually access this when we really need it. So I think there's lots of different places that you can put your money when you're thinking about a savings fund. ISAs are really good, so they're a good wrapper for you to be able to invest in. And I think you've got multiple different or almost flavours of ISAs. You can put things into a cash ISA and actually the interest rates on cash ISAs have improved in recent years. Or if you want to take a little bit more risk, maybe you want to invest for a slightly longer time period, you've got stocks and shares ISAs as well, where you can invest in them.

But, the value of them may go down as well as up. So there is a little bit more risk involved in that. But, you've got these options. I think definitely encourage people to shop around, but also to do their research and educate themselves on how they differ and what it means to try and withdraw the money at different points. And I think if you're in any doubt about what to do, definitely speak to a financial advisor, because they'll be able to give you the specific recommendations for your circumstances.

Kia: Absolutely. Completely agree. I love, and it's no secret on this podcast, I love talking about pensions. I love talking about retirement. I've spoken to Kim Brown three times on Little Bit Richer, all about pensions. Whenever we talk about this topic and we talk to 20 and 30- year- olds, it feels like such a long time away, that to be fair, I can't really envision myself at 60.

I know I'll be glamorous on a beach somewhere, but it's a long time away. So for anyone in that age bracket who knows that they need to be saving for their pension, but just doesn't really see the point right now, because it's so far away, what would you suggest that they can do to actually help them to put more money in? Because it can be hard sometimes.

Sean: Yeah. It can be. And I think it's no secret that in your twenties and your thirties, that is really the optimum time to be building your pension part. But, at the same time, it's when you also have all these different conflicting priorities to be spending your money on. It can be really difficult to make the right call there. I think there's probably three things to look at here actually.

Firstly, if you are employed and it's not your first job that you're currently working, the chances are you've actually probably amassed some pension savings in other environments with other employers. You've got other workplace pensions out there that you may be really aware of, but you also might not. So I think one of the things that you could do is ... And it's super easy to do this, is try and consolidate all of those different previous pensions into one pot, if you do have them.

You might find that actually there's a couple of thousand pounds out there that you maybe weren't really aware of or you weren't tracking. Putting that together in your current workplace pension is going to be a really important step to feeling in control.

Secondly, reviewing your contributions to your pension is really important. And I think there's a lot of tools and calculators out there that help you work back from, " Okay. This is the type of lifestyle that I want to have when I'm retired," whatever age that might be. " And therefore, what should I be saving into my pension pot on a monthly basis right now?" So you can understand what the gap is. And I think if you put that and you coincide that with the concept that we talked about earlier, where actually you only increase your contributions when you can afford to with a salary increase, for example, actually, you might find that you can close that gap relatively quickly.

And I think thirdly, the other thing is also just not to forget that most pension providers will happily enable ad hoc payments as well. So if you're looking at that gap maybe, and you think, " I should be contributing more on a monthly basis, but I just can't really afford to make that commitment right now." Well, that's okay. Just contribute a little bit more on an ad hoc basis when you can. So I'm 37 years old, but my nan still sends me money for my birthday, which is lovely-

Kia: Love that.

Sean: ... obviously, right? But, it is things like that. It's like maybe that isn't something you desperately need right now, so you could put that into it.

Kia: Yeah. Every little helps.

Sean: It's all good.

Kia: Thanks, Gran. Love that. Love that. And off the back of the points that you've made, should people also be thinking about protecting their income if they get ill and perhaps couldn't work, or maybe have lost their job?

Sean: Yeah. We talked about that emergency fund, the concept of that being a savings fund. Well, actually there's lots of different ways that you can protect for your family or for yourself, if there was something unexpected to happen. I know we've talked about that before on this podcast, but just to reinforce previous points. I think looking at critical illness cover, income protection, there's lots of different products that there are out there, that you can also use to create that same feeling of stability and security.

One of the things to look at, is if you are employed, most employers have taken steps towards giving you some of this protection as part of your benefits package as well. So it's definitely worth reviewing that and trying to understand, do I have what I need there? Or do I need to supplement it with something else externally? If you're not sure, there's always financial advisors that you can speak to get really clear before you commit to anything.

Kia: I've spoken to Koren about this already twice on the podcast. So if you haven't checked out already, go back and listen, because Koren's story is really inspiring and can really teach us a lot about protecting your income. Definitely well worth looking at if you are like me and you work for yourself.

Sean: Yeah. Absolutely.

Kia: Very, very important because you don't have any protection, unfortunately. So definitely something to have a look at. I think that's the general consensus we're on. Sean, this has been an incredible episode and you have enlightened us and made us feel like we can tackle the new year head on. But before you go, I want to ask you, what are your top three tips to help all of us improve our long- term financial fitness?

Sean: So I think tip number one would be to stay motivated and stay focused. And I think one of the ways that you can do this is not see financial planning as something that is this big, once- a- year scary thing that you need to do and you've got to endure through your gritted teeth. I think it's about changing your relationship with that and building up really positive habits, where actually like exercise, if you're doing a little bit often, that is going to be much better than trying to tackle something in a really, really big, horrible way.

I think the second one is around sharing things with friends and family and trying to have a bit more of a discussion and talking a bit more about what it is that you're trying to achieve. So again, to use that fitness analogy, if you can find a buddy, whether that's a close friend, family member, maybe a work colleague who's on a similar path to you, actually, let's just talk a bit more about what we're trying to achieve together, because it's going to help you continue being focused and motivated.

And then, I think finally is really, don't beat yourself up if you do have an expensive month, and if you go off track. That's totally fine. It's less about throwing the baby out of the bath water and saying, " All right. That's it. I'm done. I can't save. I'm rubbish at this." And just saying, " Oh, okay. Yeah. I've learned something there, but I'm just going to get back on track for future months."

Kia: Absolutely. I love those tips, especially the last one, not beat yourself up. We've just come off the back of a very expensive month with Christmas. So yeah. It's just being kind to yourself. And sometimes there's months where there's loads of birthdays, weddings, and that just happens, but it is just staying on track and being kind to yourself. So Sean, thank you so much. We are 100% ready. 2025 doesn't know what's coming when it comes to our finances.

Thank you, Sean. Lots of great ways to get us financially fit for the year ahead. Next time we're talking about all the things that you need to think about before moving in with someone with Family Lawyer, Yasmin Khan- Gunns. I'd love it if you could review the podcast, spread the word, and help others get a little bit richer too. Keep up with the show on TikTok and Instagram at Legal & General. Thank you for listening. See you soon.