Detox your cash as the year of the hangover takes hold

With a nation of debtors facing the possibility of unemployment, Julian Knight shows how to get your finances in better shape to withstand the blow
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The Independent Online

Britons are waking up to the mother of all financial hangovers. A decade of borrowing through mortgages and credit cards has left the combined debt of British households at a mind-boggling £1.3 trillion.

Now the Government is getting in on the borrowing binge, with national debt forecast to more or less double over the next five years. And these are not good times to be in the red: the UK is already reckoned to be in recession and most economists predict that 2009 will bring a massive rise in unemployment. So at the start of what is likely to be the most difficult year for well over a decade, now is the time to get your borrowing under control and make those dwindling savings and investments really earn their keep.

Here are 10 ways to give your finances a detox treatment and get them into shape for 2009:



1. Build up a lifeboat fund

Financial experts reckon that you should have the equivalent of between three and six months' income on deposit in an instant access savings account. The idea is to provide protection in case you lose your job or are unable to work because of ill health. Having a savings cushion in place will help you to pay the bills while you find a new job or get better. In recent years, though, the percentage of income saved on average by Britons has sunk to nearly nothing. In effect, people have been borrowing and not saving, so few of us have a sufficiently large cushion in place.



2. Cut down on direct debits

Britons have over 100 million direct debits leaving their accounts each month. That's more than two for each adult in the country. And according to comparison website Moneysupermarket.com, credit-crunch blighted Britons want to cut down on the amount of money going out of their accounts. One of the direct debits in line for the chop in the new year is gym membership. A recent survey from Moneysupermarket.com shows that up to 56 per cent of people with gym membership are considering cancelling it. Of these, 14 per cent admit they don't go often and will be cancelling their membership to save money, though 42 per cent say they want to keep going to the gym but can't afford it. However, don't go overboard when cutting back on direct debits as utility companies, for example, offer a discount if you pay this way.



3. Pay back the most expensive debts first

The amount of money being borrowed on credit cards is still rising, but the rate of increase is now far slower. If you are looking to pay off your borrowings in 2009, independent financial advisers and debt charities urge that you focus on the costliest debts first. Store cards are the most expensive type of commonly available credit, with interest rates often around 30 per cent – 15 times the Bank of England base rate. Credit cards aren't much cheaper, with rates actually rising over the past year, despite the recent sharp cuts in the Bank base rate.



4. Overpay your mortgage if you can afford to

By the end of 2009 it is likely that millions of Britons will once again be in negative equity – which means that their mortgage is larger than the value of the property it is secured upon – as house prices continue to fall. One way to alleviate this is to make mortgage overpayments. Most lenders allow borrowers to repay extra on their mortgage debt. Doing this has two advan-tages: it should help guard against negative equity and it can reduce the term of the mortgage. Making voluntary repayments of just £100 a month can help knock up to six years off the mortgage term of a £100,000 home loan and save a huge £27,000 in interest payments.



5. Switch energy supplier

One of the few bright spots of 2009 should be that it will bring lower energy costs. The price of a barrel of oil has collapsed over the past few months as the world economy has slowed dramatically. Likewise, the wholesale price of gas has shrunk. As yet, the big six energy suppliers haven't cut their gas and electricity prices for domestic users, but it should only be a matter of time. However, according to energy regulator Ofgem there is one key thing you can do today to cut the cost of your gas and electricity, and that is switch supplier. Ofgem estimates that if you have never switched then you are missing out on savings of more than £100 a year.



6. Review your savings

With the base rate falling dramatically in the latter stages of 2008, savers have felt a backlash. In the autumn, "best buy" savings accounts were paying more than 6 per cent. Nowadays, best-buy cash individual savings accounts (ISAs) are available at 4.5 per cent from Newcastle building society and 4.08 per cent from Barclays. However, most savers' funds are in accounts that are paying much less than this. According to the financial information service Moneyfacts, it has never been so important to shop around for the best rate. What's more, many savers are paying tax unnecessarily. Money held in non-ISA accounts attracts tax at a minimum 20 per cent. Savers are allowed to put away up to £3,600 in a cash ISA account each year and any interest earned is untaxed.



7. Look again at the stock market

Stock markets around the globe have suffered sharp falls over the past 18 months as the banking crisis has unfolded and the world economy worsened. No wonder, therefore, that small private investors have been bailing out of the stock market. Over the long term, though, most independent financial advisers reckon that share investment produces reasonable levels of both capital growth as well as income from dividends paid by companies to their shareholders. In fact, in an environment where property continues to lose value and low interest rates mean that returns to savers are low, shares could come into their own again. But after such sharp falls in value – particularly in banking and construction stocks – and with a recession under way, it would be a brave soul who rushed back into the market.



8. Consider unemployment insurance

Insurance broker Lifesearch has reported a surge in the number of people using its website to find out about unemployment insurance and it's not hard to see why. Many economists and industry bodies reckon that unemployment could rise by anything up to a million in 2009 as firms battle for survival and shed staff. There is insurance available that will pay you an income should you be one of these unfortunate victims of the recession. Unemployment insurance can also be combined with accident and sickness cover which will pay out if you can't work because of injury or ill health. This type of cover is considered far superior to the payment protection insurance routinely sold by lenders, which only meets loan repayments if you are unable to work. PPI has been widely criticised by consumer groups for being expensive and having clauses hidden in the small print that stop many policyholders from having a claim accepted.



9. Seek out high-interest current accounts

HSBC has become the latest bank to stop paying interest to the majority of its current account customers. It is likely that during the course of 2009 more banks will follow suit, particularly as HSBC has not seen a flight from its accounts as a result of its decision to stop paying interest to people who remain in credit. But there are still accounts available that pay bumper rates, as some banks are looking to build market share. The Alliance & Leicester Premier Direct account pays 6.31 per cent, and its Santander stablemate Abbey is paying 5.84 per cent. Meanwhile, Lloyds TSB's Classic Plus pays 2.96 per cent and the Halifax 2.47 per cent.



10. Move your mortgage

The credit crunch has put paid to the 100, 95 and even, in the case of some lenders, the 90 per cent mortgage deal. Banks and building societies have been looking to attract borrowers who have steady jobs and a lot of equity in their home. If this applies to you and your current mortgage deal is coming to an end or you are on your lender's standard variable rate, then it could still be worthwhile scouting around for a better deal. However, be warned: mortgage arrangement fees have risen sharply over the past couple of years and it can cost more than £1,000 to switch mortgages.

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