A calculated approach to getting your life on track

Mastering your money will give you more options, writes Simon Read
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The Independent Online

January is the time of year when families start reeling from bigger bills hitting their doormat. There could be the worry of paying for Christmas, as well as higher energy charges for all. And, for many, renewing car insurance this month will mean facing premium hikes of a third or more.

Rather than facing these problems with trepidation, there’s an opportunity to use them to kick-start your finances. With a little bit of planning and organisation, you could turn your personal finances around to ensure that you’re making the most of your money rather than being ripped off by expensive charges or uncompetitive deals.

And that’s just as true of your banking or borrowing arrangements as it is with gas, electricity or phone bills. With competition high among financial firms as well as energy suppliers, there could be better deals out there if you can take the time to find them. With the end of the tax year approaching at the beginning of April, focusing on tax matters could also yield money-saving tips for you and your family.

Budget

The first thing to do is to work out your budget. You need to know how much you can afford to save and spend before you can plan how to do so. Making a budget may appear daunting, but it is not that difficult. It’s simply a list of everything you have to or choose to spend your money on. “Only by budgeting will you be able to determine your disposable income,” says Sarah Lord, managing director of Killik Chartered Financial Planners. “You should carry out a full review of your income and expenditure, making sure it includes all your outgoings.”

Don’t just look at weekly or monthly costs. “You need to take account of the payments made only on an annual basis, such as insurance policies,” says Lord. You should also include holidays, clothes, and even entertainment.

Make a list of all your costs and then add them up. On a separate piece of paper, list all your incomes, including any bonuses or dividends. The difference between the two totals is your disposable income. If the difference between the two reveals a shortfall, it’s really time to get on top of your finances before you end up deeper in debt.

Savings

Saving for the future can be a hard habit to get into, but the rewards are obvious. Having cash to fall back on will give you choices in life. Financial experts talk about having an emergency fund, and it’s sound advice. Sarah Lord says: “Make sure you have sufficient cash in your bank account in the event of unplanned expenditure. A good rule of thumb is you should hold six months income in cash.”

If that sounds like a lot of money, then think about what it could mean to you. What happens if you become really unhappy in your current job, for instance? Without a backup fund, you probably cannot afford to quit. But having six months’ worth of income stashed away gives you time to find a new job. Or what if you find yourself stuck in a stale relationship? Six months’ money gives you enough cash to put down a deposit on a rented flat, which could give you some breathing-space. It’s all about giving yourself choices.

On top of emergency cash you should have savings for future spending, such as a holiday, a new car or for a deposit on a house. Depending on when you may need the cash, you should find the right sort of savings account to match.

So if you’re saving thousands for a house deposit, you may be happy to have an account that has a long notice period, for instance. Emergency cash, on the other hand, should be instantly accessible, which could mean turning down higher rates offered on fixed rate or notice accounts. Whichever you choose, you should make the most of individual savings accounts, which allow you to build up a nest egg tax free.

Investments

If you’re stashing cash away for a longer-term, for your retirement, for instance, or children’s education, you may want to invest the money to get potentially better returns. Choosing an investment, however, is a difficult decision and even seasoned investors can get it wrong and end up in the wrong fund or market. The secret is to split your portfolio into segments according to how much risk you want to take.

If you want to ride market fluctuations, you may want to put the bulk of your cash into emerging markets, such as China, Russia or even Africa. If you

want to play the stockmarket but back what you know, you may choose to stick to UK funds or blue chip shares, such as those which make up the FTSE100 Index. Talking through your investment plans with an expert can help.

Colin Lawson, managing partner of wealth management firm Equilibrium, based in Wilmslow, says that setting up your portfolio is only the start. “Investors must review the performance of their portfolio to ensure they are on track. Make sure you review every six months,” he says. You should also reassess your needs regularly. “Ask yourself whether you still want the same results from your savings as you did five years ago? You may have been saving to help fund your children through university, but now want to start preparing for retirement. Your preferred outcomes will have a direct impact on the type of investments you need to make.”

Borrowing

If you need to borrow money, you should ensure that you’re doing so as cheaply as possible. Your biggest borrowing is likely to be your mortgage, so you should regularly check the rate you’re paying and compare it to other deals. If you haven’t switched mortgages in the past few years, you could have lost out on hundreds or thousands of pounds through extra interest payments.

“The argument for remortgaging is growing all the time,” says Melanie Bien, director of mortgage adviser Private Finance. “For those borrowers who are on their lender’s standard variable rate it is certainly worth considering whether now is a good time to remortgage. There are some excellent deals available, particularly for those with sizeable equity in their homes.”

If you use a credit card, switching to a zero per cent balance transfer deal could obviously save you money. However, look closely at the costs. With arrangement fees now costing up to 3 per cent, transferring £3,000 could cost you almost £100.

There’s also the danger of falling prey to lethargy and not paying off your balance when switching to a zero per cent deal. Card companies bank on the chance you’ll end up switching to their standard high interest rate, of 18 per cent or more. For that reason, a zero per cent deal could be a false economy.

It may make more sense to look at ways of cutting the cost of credit or making the most of plastic. “Lenders reserve their best rates for those with excellent credit ratings so it’s worthwhile checking your credit report at one of the credit reference agencies to get any errors corrected,” says David Black, banking analyst at Defaqto.

If you only use your credit card for convenience and pay the entire bill off at the end of each month it could be worth switching to a card that gives you cashback or reward points.

Banking

As with your mortgage, it could be time to switch your current account, says David Black. “There are some very competitive introductory offers available with high credit interest rates or zero per cent introductory overdrafts,” he points out.

However, with charges becoming an important part of the way banks make customers pay for banking these days, it’s important to choose an account that matches your spending. If you often need to use your overdraft, then you should seek out an account with low charges and interest rates.

If you always stay in the black, then you could consider an account with extras. However the more an account offers, the more it charges. “If you’re considering a packaged current account then make sure that you actually need the major incentives and that they are appropriate for your circumstances,” advises Black.

Insurance

Being canny with your insurance cover could save you £1,424 in 2011, according to Moneysupermarket.com. “Savings on everyday finances such as insurance can be made by shopping around and taking several easy steps to reduce premiums,” says Julie Owens, insurance expert at the site.

For instance, younger drivers could save money by adding an older driver to their policy. Switching insurers to the best deal could save £286 a year while opting for fully comprehensive car insurance rather than third party only cover could save £192. Looking closely at home insurance, life insurance and travel insurance could also yield serious savings.

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