10 ways to change your financial habits in 2016
It’s less compelling than, say, taking up an exciting new hobby, but it will be rewarding to see your money working harder for you.
In fact, if you do a thorough job, you could save hundreds of pounds because millions of us are paying over the odds for running our homes. So why not use the start of 2016 to make sure you stop pouring money down the drain and make some savings?
1 Overhaul your mortgage
Since your mortgage is likely to be your biggest monthly outgoing, this is a good place to start. Borrowers can look forward to continued cheap money and great mortgage deals, following recent indications from the Bank of England that ultra-low interest rates are here to stay until 2017 at least.
Fixed-rate mortgages remain the most popular type of home loan, as they offer peace of mind that monthly repayments won’t increase. Deals for mainstream borrowers are attractive, especially for those with the largest deposits or equity.
Borrowers are now able to get five-year deals for less than 3% with a decent 25% deposit, and two years at around 2%. Even those with small deposits are benefiting from competitive rates, and the same is true for buy- to-let borrowers.
However, there are still currently about four million homeowners paying standard variable rates (SVRs), which mortgages revert to at the end of a fixed-term deal. The SVR will start to climb when interest rates rise. Since borrowing is cheaper than ever now, it’s worth seeing if you can save yourself some money. Speak to a broker and take a look at the sums.
If you still have a way to go until the end of your current deal, make sure you note the expiry date.
Charlotte Nelson, finance expert at Moneyfacts, says: “It would be wise for borrowers to mark the date in their diary, so they are able to secure a new deal in plenty of time and ensure they do not get caught out by reverting on to a high SVR.” Start looking for a new mortgage around three to six months before the current one expires.
2 Chase the best savings rates
While borrowers can make the most of cheap money thanks to low interest rates, savers will continue to endure rock-bottom returns. The least you can do is to move your money into the highest-paying account. Around £160 billion is idly sitting in low-paying accounts earning close to nothing. Many are closed to new savers and are no longer being marketed.
One of the problems is that institutions don’t always inform customers of the new offers or rush to offer better deals.
Another issue is that some savers who shy away from technology, such as online banking, miss out on the best rates. Nelson adds: “Many of the current best-buys are offered by the newer banks, which only operate online. Savers who prefer to do their banking n branch are committing their savings to a lifetime of poor rates.”
From April, the government is changing the tax treatment of savings so that the first £1,000 of interest is tax-free. Currently, savers are taxed at their marginal rate, which means those who pay the basic rate of tax are taxed 20% of their savings income, while higher-rate taxpayers are charged 40%. The rule change means that 95% of savers will pay no tax on their savings whatsoever. Even more reason to boost the rate you receive.
3 Ditch your bank
Do you have the right current account? Most people have been with the same bank for decades. Did you know that you can save hundreds of pounds a year by choosing the right bank? You can even make some money by ditching your bank, with many offering cash incentives to sign up such as First Direct, which pays £100.
Switching now takes just seven working days, with a guarantee in place to ensure the transfer is smooth. Have a look at your statements and if you are paying bank charges regularly, consider switching to a bank with lower fees for dipping into the red.
Some current accounts are a good way of accessing decent savings rates for those who are always in the black. For example, TSB’s Classic Plus account pays 5% on balances of less than £2,000 (you must pay in £500 a month to qualify).
The Nationwide FlexDirect also pays 5% on up to £2,500, but only for 12 months. You need to pay in £1,000 a month to qualify for the account. Tesco pays 3% on balances of less than £3,000 with no minimum amount you need to put in.
If you are paying a monthly fee, then ask yourself – is it worth the money for the so-called perks? Frequently, the extras are cheaper to buy as standalone products and you might not be using them anyway.
4 Plan ahead - build up your pension savings
There are countless surveys every year telling us a new, worrying statistic about how few people are saving enough for their pension.
Almost a third (31%) of women and 20% of men can expect to live until their 90th birthday.
This means they will be retired for almost as long as they spend in the workforce. To have a comfortable and secure retirement, it’s crucial to put something aside.
While not everyone can afford to save as much as they’d like each year, putting a little something away every month is better than doing nothing. Crucially, the earlier you save, the more time your money will have to grow.
Saving just £200 a month from the age of 25 would result in a pension pot of £305,200 at the age of 65, according to calculations by Square Mile, the investment research firm. Delaying retirement saving until age 30 would see the fund value at age 65 drop to £217,320, and leaving it until age 40 would mean a further reduced fund value of £119,100. These figures are based on growth of 5%.
Savers get a tax top-up when contributing to a pension, at the rate of 20%, 40% or 45%. So, every £800 paid in by a basic-rate taxpayer, for example, will automatically turn into £1,000. Higher-rate taxpayers can claim back an additional £200 through a self-assessment form, boosting even higher returns.
The trade-off for such great tax breaks — and free cash from your employer — is that your money is locked away until you reach 55. But in exchange for free cash, it’s a no-brainer as long as you can spare the money.
5 Pay down debts
Borrowers repaying only the minimum balance each month on a stack of credit cards are in dangerous territory. If you have credit card debts, make sure you are paying the lowest rate of interest possible. You can even cut interest payments to 0% if you can take out a credit card with an interest-free balance transfer offer, which means clearing debt faster as all repayments to go towards paying off the debt, rather than lining the bank’s pockets by paying them interest.
But make sure you’re prepared to be disciplined about not adding to your debts. Research from not-for-profit charity Fairbanking Foundation shows 29% of borrowers end up owing more money after taking out either a 0% balance transfer or purchase card.
Free and impartial advice on money issues including credit cards is available from the Money Advice Service (Moneyadviceservice.org.uk). People with serious debt problems can access free advice from the charity StepChange (Stepchange.org or call 0800 138 1111).
6 Cut the cost of utility bills
Gas and electricity take up a sizeable chunk of monthly bills – especially during winter, when there’s a long spell of cold snaps and the nation turns up their thermostats.
With climate experts expecting one of the worst winters since ‘The Big Freeze’ of 2009/2010, making sure you’re on the best-value tariff will save you money. You’ve read it before – but if you are on a standard tariff or if you haven’t switched for years, now is the time.
Find out the cheapest deal by simply digging out a bill and using the monthly repayments along with your postcode to generate a list of top value deals on Gocompare.com or Uswitch.com.
Don’t be surprised if none of the so-called Big Six energy suppliers make it on to the list.
Comparethemarket.com recently reported that almost half of its switchers moved away from larger companies in favour of smaller challenger brands, which offer better prices but can also compete on customer service.
7 Don't pay over the odds for insurance
Similarly, dig out your home and motor insurance documents and check the renewal dates. Even if they’re a few months away, put a note in your diary so when the time comes you’re ready for it. Renewal quotes sneakily omit last years’ premium, and most of the time insurers will add to it.
Many people don’t notice and automatically renew. Don’t fall into this trap – be ready to compare the price and switch to save money. You should do this every year.
8 Call your mobile phone provider to account
Your mobile phone network won’t tell you if you can get a cheaper deal. It’s up to you to find out. There are hundreds of mobile tariffs to choose from, with 76% of us on the wrong one, according to Billmonitor.com, the comparison service.
Bill Monitor, which is approved by the watchdog Ofcom, can calculate the right tariff for your needs by monitoring your usage. Before switching networks, tell your current provider you will be leaving unless it can match the one you have found. Those willing to haggle are able to making savings, so don’t be shy!
9 Stop frittering
Spend some time with your bank statements and receipts from your purse or wallet. They may not make the greatest companion, but they will definitely prove an interesting read as you pinpoint where your money really goes each month.
Highlight the items that you regularly buy, but that you could live without. Can you cut down the number of expensive take-out coffees you buy on the way to work? Should you finally cancel that gym membership? Or do you enjoy one too many take- aways in the month?
It might be a simple case of setting a budget for grocery shopping. If you make a list and stick to it, you’ll stop those frivolous purchases. Whatever your vice, it is prudent to cut down. You’ll be amazed how much you can save.
10 Become a savvy shopper
A growing army of savvy people are making daily trips to money-saving coupon sites, where using an online voucher means you can then buy everything from a simple cinema ticket to a back massage at greatly reduced prices.
Before you buy an item, visit websites Vouchercodes.co.uk or MyVoucherCodes.co.uk to see if you can make a saving.
Becoming a bargain-hunter will save you money throughout the year. And you don’t need to wait until the sales every time you want to buy something. The key to finding year-round discounts is to see whether your favourite brand has a factory or outlet store.
Marks & Spencer has a number of outlet stores all over the country. The majority of outlet stock is end of line (often from the previous season) and excess stock.
Discounts are usually 30% to 60% off the original price. For homewares, John Lewis has an outlet at McArthurGlen Design Outlet in Swindon, which offers an assortment of mostly imperfect furniture and large electrical appliances at reduced prices.
Some stock items may also be customer returns. Discounts that can be expected are up to 50% on home items, up to 30% on white goods and up to 20% off audio equipment and TVs. Also check out the likes of Gunwharf Quay in Portsmouth, Bicester Village in Oxfordshire, London Designer Outlet in Wembley and Gloucester Quays Outlet.
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.
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.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.