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, 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,'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 ( 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, 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

Savings tips

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.

Future tips

Do the maths. The Money Advice Service website ( 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.