How to give your money a new year revamp
It's the ideal time to sort out finances with this 10-step plan
Friday 28 December 2012
It's that time of year again. The presents have been unwrapped, every last scrap of turkey has been eaten, and the Christmas decorations are back in the loft for another 12 months. Now all that's left is to pay the bills and get your finances sorted for 2013.
With that in mind we have put together a list of the 10 essential resolutions that you need to make this year to get a firm grip on your finances, work out a cost-effective way of manage your debt, and make the most of any savings.
One: Get your finances sorted
Spend time getting details of every bank account, savings vehicle, credit card, loan agreement, insurance policy and pension that's in your name. To help with tracking missing assets down you can use the Unclaimed Assets Register (www.uar.co.uk) for a fee of £25 per search.
List all your assets and liabilities, ideally using a basic spreadsheet as this will not only enable you to see at a glance whether your finances are healthy or in crisis, but also assess the potential impact of any changes made to your income or outgoings.
This exercise will give you a detailed insight into your finances and could highlight discrepancies such as being double insured. For example, your mobile phone might already be covered on your home contents policy so a separate dedicated policy will be a waste of money.
Two: Reorganise your debt
How much do you owe on credit cards and what rate of interest are you paying? Do you have any other outstanding loans? Have you been sweet-talked into opening up store cards that are charging eye-wateringly high sums for the privilege?
Clearing your debts, especially credit cards and overdrafts, should always be a priority, according to Andy Gadd, head of research at Lighthouse Group. "Check that any debt you have is as cheap as possible by checking and comparing APRs and potentially consolidating various debts into a cheaper personal loan from a bank," he says.
Existing credit card debts, for example, can be moved to rival providers offering 0 per cent on balance transactions. However, you'll need to bear in mind that you'll be charged a handling fee – a percentage of the existing debt – to take advantage of such an offer.
Three: Analyse your expenditure
Every organisation needs a balance sheet and a household is no different. Using the spreadsheet you made for your first resolution, start by analysing how much you are spending each month, including noting what happens to cash withdrawals, says Justin Modray, founder of website Candid Money.
"If you're consistently spending less than you earn, that's a good start," he says. "If you're spending more than you earn you'll definitely need to make some cutbacks or seek out cheaper deals. There's no magic solution so agree where to cut back and be disciplined."
Divide your monthly expenditure into essentials, such as mortgage repayments, and non-essentials, including meals out, and make cuts if you can.
Also, identify agreements, such as direct debits for magazines you no longer read, and cancel them, paying attention to notice periods.
Four: Become a canny shopper
For those items you still need the answer is to shop around for cheaper deals. Bargain hard with retailers if you need to buy big-ticket items, such as televisions, and use online comparison sites to find the best prices on everything from cars to pairs of shoes.
There are plenty of other ways to save money. For example, it is worth picking up loyalty cards in favourite stores on which you can earn and later redeem points for buying certain products. Pay particular attention to buy-one-get-one-free deals on favourite items.
Such attention to detail can be applied to other products, such as insurance policies. You can save a lot of money by researching the market to see what's available well in advance of the renewal date of various policies. Check comparison sites and individual firms for the best deals.
Five: Establish your financial goals
Before deciding what investments will meet your needs you will need to establish how much money you need to make and what aspirations you have for the future, according to Jason Witcombe, a director of Evolve Financial Planning.
"Think about what you want from your life, not just next year but in the decades to come, and what is important to you and your family," he says. "Few people actually do this but without taking time to prioritise it's very easy to get stuck in the daily grind."
Knowing what you want out of your life and, perhaps even more importantly, what it's likely to cost will help you establish how much risk you are willing to take with your money and which investments are likely to best meet your needs.
Six: Set up an emergency fund
You never know when a crisis will happen – anything from your boiler breaking down to a member of your family needing an operation – so it's best to be financially prepared to avoid plunging into debt to solve the problem.
According to Patrick Connolly, a certified financial planner at AWD Chase de Vere, people should build up cash savings before looking at higher-risk options such as investing in shares. "It is sensible to try and get a good return on your cash savings and you can do this by looking for accounts which are paying competitive rates of interest and holding the money in a cash ISA, where all interest generated is free of tax," he says.
The current annual individual savings account allowance is £11,280, up to half of which, £5,640, can be put in a cash ISA. Look for the one that gives you a competitive rate of interest and lets you get your hands on the money quickly. If you have used your ISA allowances then consider an instant-access savings account with a high street bank or building society.
Seven: Plan for the longer term
While 30 per cent of people quizzed in a recent study for Financial Planning Week were planning to reduce their monthly spending next year and 20 per cent to increase the amount they put away, a miserly four per cent were planning to contribute more towards, or start, a pension.
It's not a surprise to John Ions, chief executive of Liontrust.
"It is not difficult to understand why so many people who are struggling to make ends meet today have little focus on tomorrow," he concedes. "This is why it is so important to communicate the message that doing something now is vital to provide more security in later years."
The fact is that the earlier you start a pension the greater the opportunity you are giving the fund to grow in value. At the very least start building up a pot of money in ISAs and other accounts, even if you distrust pensions and don't want to tie up every last penny.
Eight: Make sure you're tax efficient
Many people are paying too much income tax, which is dictated by which tax code they have been assigned. Check to see if you're paying the right amount by contacting HM Revenue & Customs (http://www.hmrc.gov.uk/incometax/check-right-tax.htm).
Once you have done this you can turn your attention to making sure your money is in tax-efficient wrappers, such as the aforementioned ISAs.
For example, the value of a £10,000 investment earning 3 per cent gross interest would be £14,802 after 10 years in a cash ISA, according to AWD Chase de Vere. However, if it was in a straightforward savings account then that total would have shrunk to £13,702 for a basic-rate taxpayer and £13,491 for those paying 40 per cent. That equates to tax savings of £925 and £1,826, respectively.
There are other tax planning techniques too. For example, husbands and wives (as well as civil partners) are taxed independently so each will have their own personal allowances. If they are on different tax rates then consider moving assets to the one paying a lower rate.
Nine: Keep track of your investments
It's important to regularly review the performance of your investments, with the most important factors being whether they've made you money and how well they have done in comparison with rivals. Keep a check on them and try to understand what has caused the outperformance or underperformance. Jason Hollands, a managing director at Bestinvest, said a study the firm recently carried out with YouGov revealed that one in five people have never re-examined their investments. "Review your portfolio before putting any new cash into the market," he insists.
Ten: Revisit your decisions
If you've reached this stage then congratulate yourself on overhauling your finances. However, don't become complacent. Revisit your investment decisions at least once a year and keep an eye on your outgoings, says Geoff Penrice, a chartered financial planner with Astute Financial Management. "Review your finances, don't hide your head in the sand, and enjoy the year ahead," he says.
Losing track of your finances can prove a costly mistake – potentially costing you thousands of pounds over time due to borrowing costs and paying over the odds for utilities and shopping," adds Mr Modray. "Once organised, it typically takes less than an hour a month to keep on top of things, which should prove time very well spent."
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