Six ways to clean up your finances
1. Write a budget and stick to it
Living within your means makes common sense but with so many outgoings it's not always easy to know where all your money is going. So the first thing to do is work out how much you spend a month and see if this is more than your total monthly income. It's then a case of juggling round the figures – seeing if there are certain things you can spend less on to cover other areas.
2. See where you can cut out spending
It may be that you are spending more than you're earning. While painful, the good thing about seeing what you spend on paper is that it can shock you into making changes - there's no room for complacency. It could just be simple things like cutting out on takeaways and bringing in packed lunches to work. Or you may need a more serious overhaul of your finances.
3. Make the switch
4. Maximise your savings
It's important to build up rainy day savings in case you suddenly find yourself out of work or faced with an unexpected bill. You should aim to build up savings of at least three months salary, ideally six. Work out how much you can afford to save each month and ask your bank to move the money the day after pay day to ensure you don't spend it.
Always make use of your annual cash ISA allowance first, which currently is £15,000, as any interest earned on this is tax–free.
Also see if your current account offers a regular savings account. These accounts are usually only available to existing customers and offer high interest rates in return for monthly contributions. These are a great way of building the savings discipline but they do usually only last a year so you'll have to seek out a better account then.
5. Do you need to switch credit cards?
While credit cards are indisputably handy, use the wrong card and it could cost you a lot. In an ideal world transfer existing credit card debt onto a 0% balance transfer card and be sure to do so again at the end of the 0% period, or pay off the debt of course. Also try to pay off more than the minimum each month as this will reduce the amount of interest you pay dramatically.
6. Pay to save
Cheapest isn't always best, especially when it comes to insurance and protection policies. It's more important to get the correct level of cover than bag the cheapest deal. Also don't be tempted to cut back on certain financial products - for example if you have a family it's essential that you have life insurance to cover your dependents.
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).
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.
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.
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.