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Three ways to take control of your finances

You had a budget, saved a little each month and you were seemingly in control of your finances. Then the Bank of England halved the base interest rate and your bank followed suit. Your hard saved cash is now sat in a bank account doing nothing, on top of that inflation increased so there’s a niggle in the back of your head reminding you that you’re losing money.

When managing your money you need to ignore the things you can’t control and focus on the things you can. Interest rates set by banks are out of your control but you can move your money to another provider or even start investing.

But even when you’ve made the decision to invest there are factors outside of your control, such as a drop in equity prices or a crash in the property market. Even you are subject to risks outside of your control such as your subconscious emotional biases. None of these risks measure up to the risk of doing nothing, by doing nothing you risk not having enough money to reach your goals.

Focus on these three things to take control of your finances.

1.    Cost

When investing cost translates to lower returns. The more you spend on your investment the lower the profit, or the higher the loss. You can manage this by looking at the costs each investment company charge; be wary of high management fees coupled with platform fees and exit fees; the list of potential charges can be endless. Try to find a provider with an easy to understand cost structure. At Moneyfarm you only pay a single, low management fee.

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By making an investment, your capital is at risk.

You also need to be wary of the cost you’re paying for the underlying funds. At Moneyfarm we use exchange-traded funds (ETFs). These are low cost passive instruments that allow you to maximise your returns, on average you’ll pay around 0.25% across the whole portfolio. Some active funds charge as much as 1.5% and in the current investment environment they rarely outperform passive instruments.

2.    Diversification

Don’t put all your eggs in one basket. You’ve heard it before but it is really relevant to investing. Invest in different asset classes, currencies and territories to minimise the risk you’re exposed to. Different asset classes rarely go up and down in sync with one another.

Investors often choose what they’re familiar with or follow the crowd, ensure you have a range of assets in your portfolio so you remain in control.

3.    Long-term trends

Equity dropped 3% yesterday and you lost £200, you’re devastated and worried, you want to take all your money out. But you shouldn’t be looking at a single day, remember your financial goals and look at the long-term trends. Investments can go up as well as down but in the long term they are proven to outperform cash and that is your aim. You want your money to work harder for you than it would do sat in a bank account.

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