Slim down your finances
Whether you had a blow out over Christmas or spent too much on this year's summer holiday, your finances may well be in serious need of a detox.
Many of us have developed bad money habits over the past year. Research from Clydesdale Bank, for example, found 28% of Brits don't have a savings account, while the majority of store card holders don't know the interest rate they are paying. And one-in-three of us admits to frittering £100 away each month on items we don't need.
So, the Moneywise Detox is here to help. Here, we show you how to flush out the financial toxins and explain how small changes here and there can help beef up your bank balance.
The B word
The core foundation of good money management is not anything complex or revolutionary; in fact, it's so simple all you need is a pen and paper: it's called a budget. Whether your aim is to clear debts, save, or simply not be left destitute in the week before payday, learning to budget will transform your finances.
You can use the Moneywise budget planner to help you monitor how much money you have coming in and going out, so that you can work out what you have left for non-essential expenditure.
Now, while this concept is quite simple, many of us find it very hard to maintain a budget because we either set unrealistic goals or don't have the commitment to see it through. It does require some determination and willpower, but it will be worth it when you start to free up more money each month.
The first step is to list all your regular monthly expenses. This will include mortgage or rent, council tax, insurance, utility bills and debt repayments, which can be found by looking at your bank statements.
Now look at the list to identify any direct debits that aren’t completely necessary and consider if you could manage without these. In a survey by Abbey around 3.58 million people admitted to having gym membership despite rarely going for a workout, and with membership costing between £40 and £90 a month it's a huge amount to be shelling out in the hope you'll suddenly develop a love for the treadmill.
Now you'll have a remaining figure that you use to finance your day-to-day living. If you take home £1,600 a month after tax, for example, and your fixed expenses amount to £800, you'll have £800 left to spread throughout the month.
The next step is to have another look at your bank statement and list any other expenditure, such as grocery shopping, entertainment, travel and personal shopping.
It's worth looking over a few statements to work out your average monthly expenditure because it can vary. This process can be quite enlightening - highlighting areas where you should easily be able to cut back.
If your statement shows lots of £10 and £20 cash machine withdrawals that you cannot account for, this is evidence of frittering away money. On average, we're guilty of wasting £100 each month. We all do it and everyone has different weaknesses - takeaway coffees and lunches, magazines, cigarettes - individually they're not worth much but together they can add up to a substantial amount over a month. This is where keeping a money diary can be useful.
"I advise the use of a diary to record every penny you spend each day for one month," says Philip Pearson, partner at financial planners P&P Invest in Southampton. "This will give a breakdown of exactly how much of your hard-earned income is being used for the essentials and what is being frittered away."
Now comes the crunch of writing a budget: setting your limits. This can be the hard bit to maintain; without guidelines your spending can easily escalate out of control. "Remember saving and meeting the basic costs of living should come before any other expenditure," says Pearson. The key to getting it right is being realistic - there's no point giving yourself a tiny budget if there's no way you'll stick to it.
The next step of the Moneywise Detox is to revisit those fixed expenses that are likely to take up the largest part of your monthly income and see if you can cut down on some of those financial calories to make your bank balance healthier.
The credit crunch means the chances are your mortgage isn't as healthy as it could be. When your current mortgage deal comes to an end, you will automatically be transferred to your lender's standard variable rate (SVR) - this might be a higher or lower interest rate than new deals on the market, but staying on an SVR could be dangerous when house prices are falling.
Monthly repayments on a £150,000, 5% fixed-rate mortgage for example, would rise by a whopping £256 a month if the borrower was transferred to an SVR of 7.75%. Indeed, research from broker John Charcol, found homeowners could be squandering as much as £369 by delaying remortgaging from their lender’s SVR for three months, and £1,500 if they put it off for a year.
The first step is to speak to your current lender to see what it can offer you. But remember, while your existing lender may offer a competitive rate to keep your custom, it's also worth shopping around through a mortgage broker.
In addition to rate, it's important to consider mortgage fees, early repayment charges and the flexibility of the product to figure out how much a mortgage will cost over the whole term. All these factors can make it tricky to compare products across different lenders, so it's worth speaking to an independent mortgage broker who can find the best deal for you.
Gas and electricity bills have been on the up, which is a good reason to review your tariff. With lots of price rises and subsequent cuts in recent years, it’s tricky to know which provider offers the best deal.
According to Paul Schofield, head of utilities at moneysupermarket.com, it completely depends on the size of your home and how much energy you use.
So, the first step it to find out how much energy your household has consumed over the past year. "If you don't have bills going back that far, phone your supplier and ask them," says Paul Schofield.
Once you know your energy consumption, visit one of the many price comparison and switching websites and enter your details to find the cheapest deal for you. Online tariffs are usually cheaper and you can cut costs further by opting for duel fuel packages and paying by direct debit.
The insurance industry is incredibly competitive, so it's likely that you can save money by shopping around instead of renewing with your existing insurer.
First, check to see how much your renewal quote is, then carry out a search of the market by using price comparison websites. It's important to look at the comprehensiveness of what is included in each policy, not just the price, so write a check list of the cover you require from each type of insurance to make it easier to compare like for like.
This will also ensure you're adequately covered in areas where you need to be, and not paying for anything you don't need.
It's also worth looking at small ways to reduce your premiums. With home and contents insurance, for example, you must state the rebuild cost of your home - many people assume this is the value of the property, but quoting this figure will really up your premium. The rebuild cost should be detailed in the survey carried out when you purchased your home, and is usually around two-thirds of the market value.
Consider whether you really require accidental cover in your policy, as this raises the cost, and whether you are willing to increase your voluntary excess in return for lower premiums. If you haven't already, consider installing burglar and smoke alarms and more secure locks in your property.
Moneywise found that making these alterations on the home and contents of a £350,000 three-bedroom terraced house in north London can knock up to £200 off the price of the policy.
The same goes for motor insurance. The idea is not to cut corners; but to avoid paying for things you don't need. Many things come as standard with car insurance, but consider whether you need legal protection and advice in the event of accident for example, or European cover, or a courtesy car as standard. Many policies also charge more if you opt to pay by direct debit instead of in a lump sum.
These extras could add up to £300 to a car insurance policy, so it's crucial to distinguish what you do need from what you don't to save money.
Moneywise offers a shop and buy insurance service, which enables you to find car, home and health insurance specific for your needs.
Phone and internet
The market for communication services is also very competitive so the chances are that once again you could save money by switching providers.
The first step is to review what you require from your phone and broadband to ensure you aren't already paying more than necessary. With broadband, you'll need to identify the speed and download limit you require. There's no point paying for a high usage package, for example, if you only use the internet to send a few emails.
If you're unsure what your usage is, you can find out by answering a few questions on switching sites such as www.simplyswitch.com and uSwitch.com, where you can follow some simple steps to change suppliers.
Similarly with your home phone, if you call overseas often it's worth opting for a deal that includes this, rather than paying extra each time you make a call abroad.
There are a number of good value packages that offer multiple services bundled together, such as home phone, broadband and cable TV, but customer service and reliability can be quite poor. Price and service are equally important with communication services, so it's worth reading customer reviews on switching sites first.
Now your finances have had a thorough detox, you should start to free up more and more money each month. The best place for this extra cash will depend on your financial situation and future plans. Clearing your debts should be your first priority and if you’re debt-free, building some healthy savings is your next goal.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.