How to find the weak link in your finances

Fans of The Weakest Link will be celebrating 25 years of their favourite game show this week. Somehow, the players always seem to send the wrong person home at the end of each round, but it’s easily done, because it can be incredibly difficult to identify weaknesses when you’re in the thick of things — and the same holds true for our finances.

The risk is that we only appreciate the weak link in our finances when something goes wrong, and it’s too late, so it’s worth considering our position, and where we’re likely to fall short.

Budget

Until we reach the age of 35, a major issue is that most people have nowhere near enough money left at the end of the month to be resilient. The Hargreaves Lansdown Savings and Resilience Barometer shows that between the ages of 20 and 24, only 15% have enough.

It means this is the stage when drawing up a budget, shopping around for the cheapest possible deals, and sticking with the plan during the tough times is particularly important.

Savings

In your 20s, you’re particularly likely not to have enough emergency savings either. To be resilient, households need enough to cover three to six months’ worth of essential spending — rising to one to three years’ worth in retirement.

Read more: What having children later in life means for your money

It means working out what you can’t live without, calculating how much you spend on these things, and then multiplying them by the number of months that suit your circumstances — depending on how secure your position is and how many people are relying on you.

Whatever your age, this is worth checking, because while older people tend to have built more savings, overall a third of people still have a shortfall.

If you need to build more, it pays to set up a direct debit out of your account on payday straight into an easy access savings account.Whatever your age, it's worth checking if you have enough emergency savings to be financially resilient.·Delmaine Donson via Getty Images

Property

Home ownership is a struggle across the board and only around a third of people are on track for home ownership.

However, there are particular gaps at younger ages, and fewer than one in five are on schedule in their late 20s. It’s always going to be difficult to free up cash at this stage, but if you can put money aside for a deposit, it’s worth considering a Lifetime ISA and getting a boost from the government.

Insurance

When people hit their 30s, protection becomes more pressing, and gaps open up. You should have enough life insurance to cover your liabilities, and to cover the cost of bringing any children up to an age when they can take responsibility for their own lives.

In our 30s, only around a third of people have enough cover and in our 40s it’s still only around half. It’s worth doing the maths as well as considering what you would live on if you were too sick to work.

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Debt

Beyond the age of 35, debts are more of an issue. This tends to happen as incomes rise, because people take on more debt — and more as a percentage of their income. It leaves them particularly vulnerable if their circumstances change.

Read more: How to reclaim overpaid pension tax

In their late 30s and early 40s, only around a fifth of people are considered resilient when it comes to how affordable their debts are. It means a direct debit to pay down your debts should be among your top priorities.

Pensions

Whatever your age, there’s a risk you aren’t on track for a moderate retirement income. Overall, only 36% of us are, but this drops to 28% for those in their early 20s, and only hits 36% by our late 30s.

The only way to know where you stand is to find out how much you have saved so far, and plug the details into a pension calculator. This will show you whether you need to boost your contributions to work towards the retirement you want.

Investment

The other long-term consideration is investment. This may not feel like a pressing concern on a day-to-day basis, but a stocks and shares ISA has the potential for far more growth than savings, and offers flexibility over how and when you use it.

Don’t prioritise it over things like debt repayment and emergency savings, but there’s nothing stopping you setting up a series of direct debits and tackling all the weak links in your finances at the same time.

Sarah Coles is a personal finance analyst at Hargreaves Lansdown and co-presents Switch Your Money On podcast.

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