Julian Knight: My resolutions to ensure a more wealthy new year
When it comes to savings, being disloyal is good, but the same isn't true for the stock market
Saturday 04 January 2014
What was I thinking? Homemade crab apple schnapps on New Year's Eve. Rather than run a mile, I actually said yes. I think it was the sheer excitement of being excused designated driver duty that sent my defences tumbling. But the next morning, as you'd expect, I paid a very heavy price. In fact, I was in such a state that I completely forgot to make my new year's resolutions. But a few days on, my head has cleared and I have finally drawn up my belated personal finance resolutions. You may want to follow some yourself, or simply choose not take the word of a self-confessed crab apple schnapps drinker.
If you ever think of yourself as "belonging" to a certain bank, building society or insurer then I'm afraid you are ripe to be taken for a ride. From car insurance through to savings accounts and mortgages, firms are routinely only interested in prized new customers, not existing ones.
What price loyalty? A fairly hefty one from my viewpoint. Companies rely on enough existing customers not being bothered to switch around – inertia if you like – in order to cream off their profits. In short, it can cost firms hundreds of pounds to acquire a brand new customer, and that has to come from somewhere.
Remortgage as soon as possible
My mortgage deal is entering its final year and I can't wait to drop it and move elsewhere. My deal from the Yorkshire Building Society was amongst the cheapest when I took it out on a long-term fix, but the Eurozone crisis and Bank of England moves have led to rates dipping to almost unimagined levels.
Effectively, if you have plenty of equity in your property, the rates you can get right now are below inflation. This is free money. I have watched mortgage borrowers filling their boots with envy and although I have offered my current provider a deal where they shift me to a new long-term fix forgoing early repayment charge, they won't play ball, so I will just have to go elsewhere. The worry is that by the time I come out of my deal, mortgage rates will have risen again.
Don't chop and change your investments
Having preached being an active consumer and moving to the best possible deal I would like to add a note of caution when it comes to the stock market. One of the key mistakes inexperienced investors make is to churn their investments too often.
Unlike savings, current accounts or car insurance, it often pays to buy and hold. All too often investors get excited on first investing and pore over their shares reacting to every little movement. However, unless there is some very bad news, in the main, the reasons why you invest one day should be the same why you choose to hold the next.
Buying and selling shares can be expensive: on a £1,000 holding just one buy and sell can swallow up £30 – that is 3 per cent or what you could expect to earn in interest in an entire year if the money was in a best-buy individual savings account. Buy and hold, combined with periodic assessment of your holdings, is a much more sensible strategy.
What's more, don't discount shares which are designed to pay you a regular income. At the moment the dividends paid by some of the UK's biggest firms offer a far healthier return than you can find from savings accounts.
Do think about the worst-case scenario
The most likely worse-case scenario for your personal finances isn't death but incapacity or serious illness. However, very few of us take any steps to guard against the massive damage this can cause.
The first thing you should aim to do is have cash available on deposit – a lifeboat fund . Most experts reckon that having the equivalent to six months' salary available is about right, but three months should suffice. Don't forget that this cash should be instantly available.
Beyond this fund, there are useful insurance policies, such as income protection, which pays you in effect a salary if you can't work, or critical illness, which gives you a lump sum should you get cancer or have a heart attack. Generally, critical illness is quite a bit cheaper than income protection but there are exclusions to be wary of. Remember, having sound personal finances is as much about putting a financial backstop to your life as finding ways to grow your cash.
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