Make 2013 your best financial year ever
With bank accounts emptied and credit cards taking a bashing it's not unusual to experience something of a financial hangover after Christmas. But rather than dwell on the after-effects of excess for months to come, if you take action now there's no reason why 2013 can't be your best financial year yet.
Brave a budget
The first step of your overhaul is to have a good and honest look at your finances. "Work out a budget," says Jatin Patel, director of personal current accounts at Lloyds TSB. "It may seem like a hassle but it could end up saving you a small fortune."
To put together a budget you need to work out what money you have coming in each month - for instance, salary, child benefit, maintenance - and what outgoings you have. With your outgoings, start with the essentials. These include your mortgage or rent, council tax, utility bills and insurance. Then tot up how much interest you'll have to pay out over the year for balances left on credit cards. And don't forget the essentials such as transport and food.
Once you've worked out all these outgoings, subtract these from your income to give you your spending money. This needs to cover your clothes, entertainment, holidays, and birthday and Christmas presents. As this is the area where bad habits can easily creep in, Patel recommends keeping a spending diary for a month. "Be honest with yourself and try to include everything you spend," he says. "Whether it's an impulse buy or a regular mid-afternoon coffee, these small purchases can soon add up."
As well as cutting back on extravagances, you can also trim the fat on some of your regular outgoings. Shopping around for better deals on everything from home and car insurance to your energy and phone bills can shave off hundreds of pounds a year.
For example, Tom Lyon, energy expert at uSwitch.com, says: "There's typically at least a couple of hundred pounds' difference between the cheapest and most expensive energy tariffs, so use an independent price comparison service to compare deals."
Tackle your debt
A bad diet of credit has an unpleasant habit of turning into chronic debt if left unmanaged, making it really hard to shift. Kevin Mountford, moneysupermarket.com's head of banking and credit cards, recommends tackling the problem head on. "Get a list of all your debt: where it is - for instance on a loan or overdraft - what the interest rate is and how much it costs you each month," he says.
Armed with the details, you can take some significant steps to wiping it out. Mountford suggests first seeing if you can switch to better deals. "A balance transfer deal on your credit card will give you some breathing space," he says. "You'll need a clean credit history, and make sure you make monthly repayments."
It may also be worth consolidating some of your debt into a personal loan. These usually have lower interest rates than other forms of debt such as store cards. If you do consolidate, look at the sums. The monthly interest may be lower but you could end up paying more over the course of the loan if you extend the term.
Another smart debt-busting tactic is to overpay. Providing there are no penalties for early repayment, this will help clear your debt faster and reduce the total interest you pay. Focus on the debt with the highest interest rate first and blitz it super-fast.
As part of his responsible debt-management strategy, Mountford also recommends setting up direct debits wherever possible to ensure you meet at least the minimum repayment. This will help you avoid those nasty late-payment charges and keep your debt under control.
"Think about your spending, too. If your Christmas spending stays on your credit card for more than a year, your debt will spiral. Try to save instead, as this will take the pressure off," he adds.
It's also important to get help if you can't see a way out. Debt charities such as National Debtline (0808 808 4000), StepChange (0800 138 1111) and Money Advice Trust (moneyadvicetrust.org) were set up to help people access free, independent debt advice.
Spruce up your savings
Once you've cleared out the debt, you can take on board some healthy saving habits. It's sensible to have at least three months' income set aside in the event of an emergency such as redundancy, but a larger sum could also form the foundation of your mortgage deposit or retirement fund.
Whatever you're saving for, it's worth adopting a regular regime. Setting up a monthly direct debit will help you stick to your good intentions and, in time, turn a series of small deposits into something more substantial. For example, save just £50 a month at 3% after tax and at the end of five years you'd have almost £3,230.
The interest rate is the most important factor when you're growing your savings, so Anna Bowes, director of savingschampion.co.uk, recommends looking for a regular savings account: "These accounts require you to commit to a regular payment for a set period but, in exchange, they pay some of the best rates around."
For example, although you'll need also to have a current account with these banks, the best rate is a stonking 8% gross from First Direct, followed by 6% from M&S Bank. But even without a current account tie-up, you could still get 5% from Derbyshire Building Society.
Watch out for the terms and conditions, though. Missing a payment or making a withdrawal can land you in trouble. For instance, skip more than one payment with the Derbyshire account and your interest rate plummets to 1%.
If you don't want to follow all these rules, look for a savings account that gives you instant access. This won't give you such high rates but you'll be better off if you need to get your hands on your money at short notice in case of an emergency.
It may also be worth sheltering some of your savings from the taxman. You can save up to £5,640 in a cash ISA this tax year (2012/13), but weigh up the interest rates before committing.
"Compare ISA rates with what you'd get after tax on a standard account, as sometimes you will be better off paying tax," explains Bowes. For example, if you went for the Derbyshire Platinum Monthly Saver, paying a gross rate of 5%, you'd get 4% as a basic-rate taxpayer and 3% as a higher-rate taxpayer. In comparison, the best interest rate ISA, the Coventry 60-day notice ISA, pays 3.1%.
Once you've got your emergency savings fund in order, you may want to consider pepping up your finances with some investments. These can give a better return than savings but, as Patrick Connolly, certified financial planner at AWD Chase de Vere, explains, you need time. "Make sure you can afford to put your money away for at least five years, but ideally 10 years or more. This will ensure you can ride out the ups and downs of the stockmarket."
Invest for success
Another important investment ingredient is diversification; the greater the variety of investments you hold, the less likely you are to lose the lot if something performs badly.
Collective investments such as unit trusts, open ended investment companies (OEICs) and investment trusts hold anything from 30 to 150 or more different underlying shares so you get instant diversification, but aim also to build up a portfolio of funds investing in different regions and assets.
The way you invest can also bring benefits. Connolly explains: "Successful investing involves buying low and selling high but it's very difficult to know when is the best time to buy. You can reduce the risk of getting the timing wrong by investing on a regular basis rather than with a lump sum."
Investing on a monthly basis means you can also take advantage of the fact you'll be able to buy more units when markets are low. For example, if you invest £50 a month and units are £5 each in the first month, you'll get 10 units. If the price falls to £4 the following month, you'll get 12 units. This gives you 22 units, compared with 20 if you'd invested a lump sum of £100 at the start.
Regular investments can be set up from around £50 a month, and you're best doing this through a fund supermarket such as Fidelity FundsNetwork or a discount broker such as Interactive Investor rather than going direct. This way it'll be cheaper, as many discount the charges, and in addition you can see instantly where you're investing and switch funds quickly and easily.
Don't overlook your ISA allowance, either. There's no capital gains tax to pay on an ISA, nor any further tax on any income you receive. This tax year, you can invest up to £11,280 in a stocks and shares ISA, minus anything you pay into a cash ISA.
As well as short-term improvements in your finances, reviewing your affairs regularly can help you establish some long-term changes to your money habits.
"Think about your long-term goals as you're setting up savings and investments. What are you saving for? A mortgage deposit? Starting a family? Retirement? This will help you stick to your monthly commitments," explains Jason Witcombe, director of Evolve Financial Planning.
Fix your goals
You can also take other steps to realise your longerterm plans. Although it could be as much as 40 years before you start to take a pension, the earlier you start saving, the more time your money will have to grow.
For instance, saving £150 a month into a pension at age 25 would give you a retirement income of £655 a month if you retired at 65. Delay starting your pension by five years and your monthly income falls to £521.
It may be easier to find this money than you think. You'll receive tax relief on any contributions, turning every £100 you pay in into £125 for basic-rate taxpayers, and with the introduction of the autoenrolment pension regime, your employer will be required to make a contribution, too.
If you have a family it's also important to think about their needs. Writing a will helps to ensure your wishes are carried out, from who inherits your money to who will look after your kids should anything happen to you.
You may also want to take out life insurance to provide some support. Life insurance costs very little when you're young but it can give you peace of mind that your loved ones are protected.
Household bill tips
Pay your energy bills by direct debit. Suppliers often offer valuable discounts if you pay regularly.
Go paperless. It's cheaper to email a bill and the energy providers and phone companies will reward you for this.
Double up. Move to dual fuel to unleash a number of discounts from your supplier.
Monitor your mobile usage. "You can save an average of £11 a month by switching mobile provider," explains Ernest Doku, telecoms expert at uSwitch.com.
Find your perfect account. Think about what you can afford to save, how long you can tie up your money and whether you'll need access to it, then plump for the highest-paying account that suits your requirements.
Set up a monthly direct debit into a savings account. It's easy to forget or spend the money if you pay it in manually.
Keep on top of terms and conditions. Some of the biggest interest rates come with conditions on payments, withdrawals and terms, so make sure you don't accidentally fall foul of them.
If your salary increases or your outgoings decrease, think about increasing your savings, too.
Do the maths. The Money Advice Service website (moneyadviceservice.org.uk) provides a pension calculator so you can work out how much you need to save for retirement.
Take the money. If your employer offers to pay into your pension, this is seriously worth accepting unless you can't afford the contributions needed to qualify for it.
Write a will. Look out for Will Aid every November when solicitors write your will for you for free in exchange for a donation to charity.
Assess your inheritance tax (IHT) liability. IHT at 40% is payable on anything in your estate over £325,000, but using planning strategies including annual exemptions and trusts can help avoid this tax.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
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.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
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.
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.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
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.