Get the savings bug in 2012
Whether you have unhealthy debt levels or want to plan for your retirement, take the time now to rethink your finances and see the positive side effects throughout 2012.
GET THE SAVINGS BUG
Admittedly, interest rates aren't what they used to be. Savers could find accounts paying up to 7% in the heady pre-crunch days. The average is now a more subdued 0.93% on easy-access accounts. However, saving regularly is still a good habit to get into. The best place to put your money will depend on how easily you need to access it and if you have a small amount to put away each month or a bigger lump sum.
Interest rates on easy-access accounts are lower than on fixed-rate ones, which pay higher interest in return for locking your money away for one, two or five years. Initially you should build up an emergency savings pot of at least three to six months worth of salary that you can get to easily. Always use your ISA allowance first, as you would pay no tax on the interest earned.
To illustrate, with an ISA rate of 3%, you receive all interest earned whereas with a savings account, a basic-rate taxpayer would receive 2.4% interest after tax and a higher-rate taxpayer would only earn 1.8%.
If your annual cash ISA allowance is already used up, see if your current account provider offers any preferential savings rates. For example, First Direct and HSBC current account holders can take advantage of their banks' regular savings accounts, both paying 8%.
DRAW UP A BUDGET
A quarter of Britons (26%) don't give themselves a clear budget each month, according to the Institute of Financial Planning. It may seem like a dull process but it ensures you have no nasty surprises.
Divide your expenditure into two parts: essential and non-essential. Mortgage or rental bills, household costs, including food, travel and any bank or credit card loans fall into the essential category.
Non-essential expenses would include holidays, going out and leisure activities, such as gym membership and hairdressing appointments.
Note down how much you spend each month, or each week if you find it easier, and don't forget to factor in one-off costs, including the annual MOT and extra expenditure for Christmas.
You will now be able to see how your expenditure matches up to your total monthly earnings. Do you have any money left over you could put into a savings account? Or are you spending more than you're earning? If so, see if there's anywhere you could cut back - for example, do you use your gym membership - or could you get your purchases cheaper elsewhere?
Loyalty rarely pays and in these cash-strapped times, bartering could see you save on anything from your mobile phone deal to your energy bill.
Regular savings accounts
The attraction of these accounts is the high interest rate they pay. They require customers to deposit money each month, without fail. They come with a number of restrictions, such as monthly deposit limits, no one-off lump sum deposits and restricted withdrawal facilities. Although they are marketed with impressive-looking rates, it’s important to remember that as your money builds up gradually, your overall return will be lower than if you’d deposited a lump sum.
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.
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.
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.