Take control of your finances
For most people, money matters are the financial equivalent of the cupboard under the stairs packed with odds and ends we don’t know what to do with, and can’t bear to look at. A recent survey by the Institute of Financial Planning found that 93% of people were worried about their financial future, and 56% were struggling or falling behind with bills and other commitments.
However, we’re missing the bigger picture. It’s not just a financial meltdown we need to be afraid of – if that cupboard door remains closed, and our finances aren’t tackled head-on, it could end up costing us tens of thousands of pounds, if not more.
So, as the credit crunch continues to tighten its grip, there’s never been a better time to review your finances and make changes that could save you money in the coming months, and shore up your finances for the future.
One issue many of us are likely to put off is the repayment of debts and, while it might be easier to place our debts at the back of our mind, this can be a costly mistake.
Becky Wilks, from National Debtline, explains: “Often people are simply afraid of what’s going to happen, so they bury their head in the sand and don’t answer the phone and don’t open their post, hoping it will all go away – which of course it won’t. In fact, the longer you fail to face up to it, the more interest you will accrue.”
In addition to the extra interest, there are a host of other penalties. A lender may move poor payers onto a higher interest rate or impose charges. If it’s an overdraft, you may end up with a charge every time you use your account, and your debts can easily mushroom. With the average household in the UK having a debt of £9,475 (excluding mortgages), according to government figures, it’s perfectly possible with added interest and charges to add another £2,000 if you wait more than a year to sort it out.
The best bet, Wilks says, is to write to your lenders with a suggested repayment plan that you can afford. In return you can ask them to suspend interest and charges, so your repayments have an opportunity to make a difference. More articles on debt and how to tackle it.
These costs, however, are a drop in the ocean compared with what we could face if not insured. People put off buying cover because it can be expensive, and they don’t expect to need it. But, damaging events happen unexpectedly; the thousands of people caught in flash floods this year probably didn’t see that coming.
Replacing your home contents after a flood would be an expense that could set you back for years to come. Legal & General puts the cost of the average contents of a three-bedroom house at about £40,000. In a disaster, where your home and contents, as well as your car were destroyed, you could find yourself needing more than £150,000 to put your life back together – and an amount of that size could sink you forever.
Of course, most of us are likely to have insurance – but the chances are we’re paying more than we need for this security as we repeatedly fail to shop around for a better deal when our policies come up for renewal.
Peter Gerrard, head of insurance at Moneysupermarket.com, explains: “With car insurance, for example, companies tempt you in as a new customer with a discount. In year two, you expect your premium to have gone down because you haven’t claimed but, without the discount, it may increase by as much as 50%.” So, on a £350 policy, that’s an additional annual cost of £175 before inflation.
Our mortgage repayments are the biggest cost we have to pay every month. But, again, if you have failed to stay on top your finances you could be paying over the odds. When your initial deal runs out, you’ll automatically be switched onto the lender’s standard variable rate (SVR) which could be as much as 2% higher.
Robert Clifford, managing director of Mortgageforce, says: “Inertia has been very useful for lenders, because it has resulted in thousands of borrowers reverting to the SVR.”
On a £200,000 loan, this could mean a difference of as much as £2,240 a year.
The credit crunch has provided the perfect excuse to put off remortgaging, and staying on a SVR might be the only option for many people who have gone into negative equity or have credit history issues.
However, as Clifford explains, for many people getting a better deal may not be as difficult as you expect. “It’s a supply contraction. It isn’t a supply freeze, so there are still hundreds of deals available for people with a reasonable amount of equity in their home.”
You can find a deal on your own, first looking online, and then calling lenders for quotes. Alternatively, you can use a mortgage broker.
Saving and investing
Failure to stay on top of our finances is costing us money right now. However, it will also cost us later. For example, when we need to fall back on savings and we don’t have any.
The IFP survey found 26% of people aren’t saving anything. The real cost of failing to save isn’t in interest, which tends to roughly keep pace with inflation (after tax). The issue is what you would do in an emergency without savings: you’d have to borrow and start paying interest.
For an emergency fund, it makes sense to pick an instant access account. It’s worth looking for a provider with a consistently good rate of return rather than chasing top payers, who may drop out of the rankings within six months.
If you’re concerned about the security of banks, you don’t have to worry until you have more than £50,000 – as any savings up to this amount will be protected in the event of a collapse. Only if you have more do you need to think about spreading your money across a number of accounts. Read our article "How protected are your savings" for more information.
More commonly we fail to consider pensions. Tom McPhail, head of pensions research at advisers Hargreaves Lansdown, says: “If someone has come out of university with £20,000 of debt, and has aspirations towards owning a house, or even just a car, they have priorities other than their retirement.
“However, the cost of delaying starting a pension can be significant. Leaving it for just five years could see your eventual annual income fall by a third. If you leave it 10 years, it will drop by more than half.”
For most people, the easiest way to save for retirement is through your work scheme as it’s likely that your employer will make contributions on your behalf too. It’s tempting just to pay the minimum contributions – something as they say is always better than nothing – but if you want to enjoy your retirement it’s worth thinking of the bigger picture.
McPhail says you need to think about the kind of retirement you are expecting, and the income you need to achieve this. This gives you a target to work towards and then you can work out how much you need to save in order to achieve that.
Online pension calculators, such as the one on the Financial Services Authority’s consumer website, moneymadeclear.co.uk, can help or you can consult an independent financial adviser.
Looking as far ahead as a pension can be a leap of imagination too far for many people. Getting people to think about what will happen when they get ill or die is even harder.
Julie Hedge, an adviser with IFA Christie Scotts, says: “This is one of the most common things people put off, because they don’t think they’re ever going to get old or die.”
However, it’s worth preparing for life’s unfortunate surprises. According to the British Heart Foundation, somebody in the UK has a heart attack every two minutes while Cancer Research says that one in three people will get cancer at some point in their lives.
There’s no fail-proof way of protecting yourself from illness but you can protect yourself from the financial consequences with the right insurance policy.
Matt Morris, spokesperson for brokerage LifeSearch, says: “If people have debts or dependants, their first stop should be life insurance. You need to think about how much your family will need in the event of your death.”
Life insurance can also be combined with critical illness cover which will pay out if you contract one of the life-threatening conditions covered by the plan. If you don’t have debts or dependants, it’s worth considering income protection to provide a monthly cash benefit should you suffer an accident or illness that prevented you working. You would typically receive 50-60% of your salary.
Once again it pays to get protection sorted sooner rather than later.
Morris says: “The younger and healthier you are when you take it out, the cheaper it will be, so to put it off will cost more in the long run.”
Writing a will
Fear of illness and death is one of the reasons why people put off writing a will. Anna Lewis, a partner in the private client group at law firm Cripps Harries Hall, says: “I’ve come across the superstition that people think if they have a will they will be on the slippery slope.”
People also put it off because they can’t decide what to do with their estate.
Lewis says: “Often it’s something fairly trivial they can’t decide and it stops them making even the most basic will. Others don’t understand how the rules work if they die without a will and assume it will all pass to their husband or wife.”
However, the cost of delaying can be terrible. “If there’s a dispute or you have to go to court it will easily cost at least £10,000 and can typically cost around £50,000,” says Lewis.
Clearing up your finances may be a dirty job. It may take time, energy, some arithmetic, and no small amount of bravery. But the alternative makes it worthwhile. Psychologist Dorothy Rowe says: “People need to think about what they stand to lose if they don’t act, and use this fear as a motivator.”
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.
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.
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.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
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.
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).