Understanding basic personal finance

With just a little time and effort you can make a big difference to your wallet, says Simon Read

Tuesday 25 January 2011 01:00

Millions of people may have resolved to sort out their finances this year but, despite their good intentions on New Year's Eve, almost a month later the majority will have taken no action.

There are lots of sensible reasons why some people never get round to dealing with their debt or working out their budget. Many take the view that life's too short. Others may start to get their statements out and then give up on the basis that it's all too complicated. Both sorts of people are wrong. Life expectancy is actually getting much longer and millions of today's 20-year-olds are now expected to live to be 100. For that reason, the sooner you get on top of your finances, the longer you'll have to enjoy your life, rather than spending most of it worrying about money.

As to the accusation that dealing with finance is too complicated, that's really a bit of a cop-out. Lots of things in life can be complicated – relationships, the back-pass rule – but we get on with them.

These days there's no excuse for not understanding basic personal finance. There is plenty of free information around – not least in The Independent's weekly Your Money section, published every Saturday – and with very little effort, you could make a real difference to your financial situation.

It's a difference that you could probably add up in pounds and pence. Sorting out your mortgage or credit card debts could save you hundreds or possibly thousands of pounds in the next 12 months alone.

Switching services such as gas or phone is also an easy ways to reduce regular bills. And if you really get into the concept you could introduce lifestyle choices that end up saving you a packet.

Do you still buy coffees every day, for instance? If so, you're probably blowing between £10-£15 on them every week. That's around £60 a month or £720 a year. On coffee! Do you want to spend that much money on coffee or would you rather use the cash for a decent week's holiday or an up-to-date widescreen television?

Getting on top of your finances will not only save you money but will help you identify other ways to cut back, freeing up cash for the things you really want to do.

Paying off debt

At this time of year, one of your biggest worries could be how to pay off your Christmas and New Year excesses. A fifth of Britons borrowed to pay for the Christmas just gone, according to a survey published yesterday. Digital banking specialist IE says that more than half of British adults are in debt, with around a third having no plans or budget to repay their debts.

That's a recipe for disaster, warns James Richards, director at IE. "It's important that all of us get into good habits when it comes to monitoring our spending and keeping a close eye on our money," he advises.

One way to keep on top of your spending is to set up regular balance and spending alerts to be sent directly to your mobile, for instance. "Burying your head in the sand is the worst thing you can do – it's not too late to set a New Year's resolution to get a grip on your finances in 2011," says Richards.

With the latest unemployment figures published last week revealing that around 2.5 million people are currently out of work, the number of people getting close to financial disaster is climbing. In fact, debt charity the Money Advice Trust reckons that some 145,000 unemployed people are already struggling with unmanageable debt.

"With unemployment on the rise and Government cuts in social benefits due to hit home, our concern is that it is looking as if the public's recession starts here," warns Joanna Elson, chief executive of the Money Advice Trust.

"In addition to concerns around unemployment, the cost of credit is being widely forecast to increase in the near future. PricewaterhouseCoopers has predicted a rise in credit card and personal loan costs this year, meaning that many people who are just managing to keep their finances in check may be pushed over the edge in 2011."

In other words, families who think they are doing fine with their finances now could be tipped into trouble when interest rates rise. Even relatively comfortable folk are facing cutbacks that could be crucial.

A family with two children where only one person earns around £45,000, for instance, is set to be £700 worse off when the Government's new tax laws come into effect on 6 April, according to accountants Deloitte.

It means many more people could fall into debt worries when the cutbacks and tax increases strike.

Getting cheaper insurance

One major rising cost that many families are already feeling the negative effect of is car insurance. Motor cover soared 33.2 per cent last year, the biggest annual increase since the AA started monitoring prices in 1994. Over 2010, average premiums increased by £210 to £843. There was no respite in the final quarter, with prices climbing 6.4 per cent, adding £51 to the cost that drivers typically pay for an annual comprehensive car insurance policy.

For home insurance, the typical cost of a buildings policy also rose by £10 or 7.7 per cent over the quarter to £143. Over the whole year, home insurance was up 10.2 per cent.

"There has been no let-up in premium increases as insurers have struggled against losses from 2009, when for every £100 taken in premiums, £123 was being paid out in claims," says Simon Douglas, director of AA Insurance.

Insurers say the increases have been fuelled by fraud. "There's been a sharp growth in the number of accident management and personal injury claim firms, which has helped develop a hard-sell system in Britain that encourages people to claim, even if they have not suffered an injury," says Douglas.

The sharp increase in the cost of cover prompted a House of Commons Transport Committee inquiry into the car insurance market. But MPs accepted insurers' explanations. It means premiums will continue to rise in 2011.

It also means that the only way to cut the cost of cover lies with you. There are various things you can do to reduce insurance charges. The first is not to accept the new premiums your insurer quotes. Talk to other insurers and go online to get quotes from other firms. Having just done this myself, we saved almost a quarter of the cost of annual cover. It's also worth paying upfront rather than monthly – it will work out cheaper.

If you can garage your car or keep it off the road, you could cut 10 per cent off the cost of cover or taking larger excess – the amount of any claim you agree to pay – can also reduce premiums.

If you don't use the car much, or plan to use it less this year, tell your insurer. The AA reckons that accepting a 12,000-mile cap on annual mileage would knock 10 per cent off the cost of your policy. A 5,000-mile cap can earn even more. That's because if you drive less you're less likely to be involved in an accident.

Check borrowing details

Lenders are notorious for adding hidden charges to debt, but if you know about them, you can avoid them. On your current account, for instance, you could be charged for each day you go overdrawn, which could be a powerful motivator to get back into the black.

If you're planning to switch mortgages – and doing so could be a great way to save lots of cash – then you need to look very closely at the charges and fees. Mortgage lenders often offer what look like great deals – low interest rates and so on – but then catch you out with relatively hidden charges, often as much as £2,000.

In fact research by Which? Money has revealed that there are a total of 39 different types of fee currently charged by lenders.

Set-up and additional fees can include anything from booking, administration, arrangement and valuation fees, to charges for falling into arrears, changing from interest-only to repayment and even for choosing to take out your buildings insurance with someone other than your mortgage provider.

So when working out which type of mortgage deal is going to be best for you, it's essential to factor in the fees.

Which? has also taken a close look at credit card companies this week and discovered that some are regularly giving consumers false or misleading information when they call to make a credit card claim enquiry. Undercover investigators found that 71 out of 120 calls to credit card companies failed to give researchers useful and correct advice about making a claim.

When most of us choose a card based on the cost, it's important to bear in mind that other factors can make taking out the wrong type of plastic a nightmare. "It's not as if the rules on credit card claims are complicated," points out Which? chief executive, Peter Vicary-Smith. "This situation is unacceptable – companies must accept that advice really matters. Consumers are potentially missing out on money they're owed because they've been misinformed. The industry must know the rules, and it shouldn't be up to the consumer to remind them of their rights."

Make your savings tax-efficient

Each year you are allowed to put cash in an individual savings account, which means it is locked away safe from tax demands. You can put up to £10,200 into an ISA in the 2010-11 tax year, up to half of which can be in a cash ISA.

From 6 April, you'll be able to put £10,680 into a 2011-12 ISA, which means you can stash away more than £21,000 in the next three months and pay no tax on the gains. Failing to use your ISA allowance effectively means handing cash to the Government, which is not something any of us likes to do.

"Especially in the current low interest rate environment, it is important to make sure your savings are working hard for you," says Karen Barrett, chief executive at Unbiased.co.uk. "There are still far too many people who are not saving and investing in a tax efficient way and a total of £36 million is set to be wasted this year alone by people not making use of their ISA allowance."

With so many different savings and investment opportunities available, it could be a good idea to take professional advice about your savings options and your tax situation. An independent financial adviser will look at your finances as a whole and choose the best account or fund for your individual circumstances. To find one go to Unbiased.co.uk and search for an independent financial adviser close to your chosen postcode.

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