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We all want to save and invest more. If you’re in the grip of a cost-of-living crisis, though, it can be hard to figure out where the money is coming from. You may feel like you’re losing control rather than taking control. 

There are steps we can all take to get us back on financial track though. Here, we’ll show you some of the actions you can take, such as creating a budget that works for you, making the most of opportunities to boost your savings and paying down high-interest debt. This is the first of our three steps towards long-term financial success. 

1. Create a budget that works for you

An effective budget is one you can stick to and helps you to see where you’re spending money. List all your essential monthly costs; everything from your mortgage, food and utility bills to your council tax, home/car insurance and childcare. This helps to identify where you can save money, even if it’s only a small amount like cancelling a subscription that you don’t really need. 

Once you know your day-to-day needs, you can see whether to focus on controlling your spending, or whether you have capacity to achieve other financial goals. This might include setting up emergency or contingency funds, for example, or thinking about any unmet insurance or investment goals.

2. Make the most of your employer’s pension contributions

More than a third of UK employees work for an organisation that offers more than the minimum 3% contribution1 to their workplace pensions, with a third of UK employers matching their employees’ contributions in full2, up to a certain limit. Even though extra employer contributions are effectively free money, many people fail to make the most of them. 

By taking full advantage of employer matching, you can make a big difference to your long-term finances, effectively doubling your pot in some scenarios.

Our chart below shows three scenarios, the first using the current legislation introduced in 2019. The second and third scenarios show the employee contributing an extra 2% of salary and an extra 4% of salary, in both cases matched by the employer. 

The figures assume annual investment returns of 6% and an employee salary of £40,000 (which increases by 3% each year). No allowances have been made for investment platform fees and taxes.

Employer matching pays off

Source: Vanguard calculations. This hypothetical scenario is for illustration purposes only and doesn’t represent a particular investment or its expected returns. Assumes annual returns of 6% per annum, while monthly returns are assumed to be the geometric averages of these values. Input figures are based on an annual starting salary of £40,000 increasing at 3% per year, over a period of 30 years.


As you can see, an employee gets a pension two times larger when they contribute an additional 4% of their salary compared to contributing nothing at all. A relatively modest contribution of 2% of salary results in a pension worth 50% more than under the smallest contributions. Next time you get a pay rise, you may want to consider diverting some of it to your pension!

3. Get to grips with your debt

Managing debt should also be a top priority. To begin with, you may want to focus on how you can meet the minimum payments on your debts. This will help to ensure that you don’t rack up any unnecessary charges and improve your credit score. You can often set up a direct debt to automate this process for you. 

Try to tackle debts with the highest interest rate first. As interest is added to a loan, the loan balance builds, with the provider charging you interest on your interest. This is where the power of compounding can work against you over time, with debt snowballing and becoming ever larger. 

It rarely makes sense to invest before you pay down high-cost credit card debt. The chart below shows what we expect for global shares and bond markets to return each year for the next decade and compares that to a typical annual interest rate on a credit card. As you can see, the credit card rate is much higher!

Beware high credit costs! You’ll face more in interest costs than you can hope to make investing

Source: Vanguard calculations. Comparison between the median 10-year Vanguard Capital Markets Model (VCMM) projected annualised investment return distributions, with common consumer debt interest rates (Annual Percentage Yield APY). Credit card at 22.2% is a hypothetical example and is not meant to reflect a true cost of lending.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes (in GBP) from the VCMM are derived from 10,000 simulations for each modelled asset class.

Having taken care of higher-interest debts, you can decide whether to pay off lower-interest debts or make overpayments on your mortgage. You may be able to take advantage of tax incentives when investing or achieve a better return than from paying down debt. However, some people simply have an aversion to debt and want to pay it off quickly. 

In the next piece in our series, we’ll be looking at how to prepare for the unexpected.

Taking control of your finances

1. Create a budget that works for you

2. Make the most of your employer’s pension contributions

        a. Find out the details of how much your employer will pay in

        b. Make room in your budget to contribute to your pension

3. Get to grips with your debt

        a. Find out the minimum payments on all your debts 

        b. Set up payment reminders or consider automating the minimum payment on your debts

        c. Rank the interest rates of all your debts

        d. Allocate money towards paying down high-cost debt

        e. Take advantage of one-time windfalls such as tax refunds and bonuses to pay down high-interest debt

1 Since April 2019, UK employers have had to pay a minimum of 3% of an employee’s salary above £10,000 into a workplace pension scheme. The employee pays 4%, with an additional 1% coming from the government as tax relief, giving a total contribution of 8%.

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Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Any tax reliefs referred to in this article are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.

Important information

This article is designed for use by, and is directed only at, persons resident in the UK.

The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.  The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.


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