Work out your budget
It still amazes me how many clients I meet with who simply don’t know how much money they spend each month (and what it goes on!). Working out (and sticking to) a monthly budget is all about spending less than you earn. If you achieve this, month on month, you will be in a better financial position at the end of 2006 than you were at the start.
If you reach every pay day with an overdraft or credit card debt to clear from the previous month you are starting the new month on the back foot. Make it your personal finance resolution for 2006 to never spend as much as you earn each month. If you really want to buy something shiny and new but find yourself reaching for that credit card or store card, stop, think – do you really need it now or would you feel much happier if you bought it in a few months time with cash rather than debt?
Get out of the red
If you have short term debt (credit cards, store cards, overdrafts, etc) you will know that debt is a drag. It’s a drag on your ability to save for future objectives. It’s also an emotional drag on your attitude towards money and personal finances. Make clearing your short-term debt a priority before embarking on strategies to save for short-, medium- and long-term plans.
I still meet people with some very funny attitudes towards debt. There are people who prefer to have savings running alongside debt even when they are often getting charged much higher interest rates on the debt than they will ever receive on the savings. Whilst there is a certain comfort factor in knowing you have some savings behind you, it is counterproductive if your short-term debt is holding you back.
Don’t forget that the interest you get on your savings is taxed (10%, 20% or 40% depending on your income tax rate). When you compare your debt and savings interest rates always look at the net (after tax) interest rate you get on your savings to make a fair comparison.
Make a plan. This ties in closely with your monthly budgeting exercise. When you are working out what you are going to spend your money on each month ensure you prioritise debt over savings. Stop taking on more short-term debt. Mark a debt-freedom day on your calendar and stick to it. Celebrate your personal debt-freedom day; it’s something to be proud of.
Look to the future
One in ten of those surveyed by IFA Promotions claimed that starting a pension was their biggest priority in 2006. This year sees the biggest shake-up of pension rules seen in many years but this brings a great deal of retirement planning opportunities with it. From this April it will generally be possible to make much larger pension contributions than under the current rules. These large pension contributions will still be able to attract tax relief at your highest rate of income tax.
Once you have made contributions to a pension plan you can choose how the money will be invested. Seek professional advice to ensure that your retirement plans are invested in a way that is in line with your attitude towards investment risk, reward and volatility. You can choose from a wide range of investment options within modern personal pensions so there is no need to take unnecessary risk that you feel uncomfortable with.
Pay less Tax
No-one enjoys paying tax but many of us fail to take the simple steps that enable us to pay less tax. Each and every year we waste an average of £132 per taxpayer because we don’t take some simple planning steps and maximise our tax allowances.
There are some very easy tax-saving strategies you can use in 2006 to pay less tax.
If you are a higher rate taxpayer and your spouse is a non-, lower- or basic-rate taxpayer then consider transferring savings into their name. If you have £20,000 in savings in a joint account where one of you is a higher rate taxpayer and the other is a non-taxpayer (assuming a 5% gross interest rate) you can save £200 a year in income tax by switching from a joint account to a savings account in your spouse’s name.
Make sure you use your Individual Savings Account (ISA) allowances for this tax year and the next tax year. You have until April to maximise contributions into an ISA for the 2005/06 tax year. Every adult in the UK can contribute up to £3,000 into a cash mini-ISA and £4,000 into a stocks & shares mini ISA each tax-year, or up to £7,000 into a maxi ISA. The returns within your ISA are tax-free (with the exception of the 10% tax credit on UK dividend income which can no longer be reclaimed on UK equity income).
Consider maximising your pension contributions to get maximum tax relief. You have until 31st January 2006 to carry-back a pension contribution to the 2004/05 tax year. This year is the last opportunity you have to elect to have a pension contribution treated as if it was made in a previous tax-year. When the pension rules change in April 2006 this feature of pension contributions is being removed.
Review your mortgage
With interest rates at historically low rates, now is a good time to consider reviewing your mortgage. If your mortgage is on your lender’s standard variable rate (SVR) you are likely to be able to make a reasonable monthly saving by switching to a more competitive interest rate or product. There are costs associated with re-mortgaging and it makes sense to seek impartial expert advice. This will also save you the time of trawling the high street to locate the best offers. Because mortgages are a dynamic market the rates available are subject to change on a regular basis and some deals will only be available through an independent adviser.
Sort out your financial affairs
If you don’t have a Will, get one. You can write your own Will but there are some major risks involved with this DIY approach. Getting something wrong when writing your own Will could lead to significant legal fees to sort things out after your death. Find a professional to write your Will from the Society of Trust and Estate Practitioners (www.step.org). If you die without a Will, your estate will be distributed according to laws created in 1925. It is no surprise that these laws probably do not reflect modern thinking on inheritance! Don’t risk dying ‘Intestate’.
Whilst we are on this rather morbid subject you should also think about family protection. Run through a number of scenarios. What would happen to your family financially if you were to die? What would happen if you were to suffer a serious illness? What if you suffered an accident or illness and were unable to work for a long-term? Re-run these scenarios but apply them to your spouse as well. The impact of a house person dying or contracting a serious illness can often be as serious (or more so) than if this happens to the main bread-winner.
Check out your existing arrangements to ensure that they remain competitive. The cost of life assurance has generally fallen in the past five years. There are potential savings to be made here. Again, use an independent expert to review the entire market for you and ensure that the cover you are putting in place is suitable for your circumstances and objectives. At the same time make sure that your life assurance is written in trust. Writing these policies in trust can ensure that the proceeds are paid out quickly, to the right person or people and without liability to tax.
Meet with an Independent Financial Adviser
Make 2006 the year that you carry out a comprehensive review of your personal finances and financial objectives with an impartial professional who has access to the tools and knowledge needed to improve your current and future position. Most IFA’s offer a free initial consultation with no obligation they can identify areas that they can help you with and you can grill them about their qualifications, experiences and charges.
Ask lots of questions to ensure that you have found the right IFA for you. Make sure that they hold the appropriate qualifications to deal with your situation. The entry-level qualification for a financial adviser is the Financial Planning Certificate (recently renamed the Certificate in Financial Planning). This level of qualification is really only suitable if you are only seeking basic financial advice. If the advice you require is more complex then look for an adviser who holds the Advanced Financial Planning Certificate (AFPC). This is a more stringent test of knowledge and competence to provide financial advice.
Also, check that the adviser is truly independent. In June 2005 there were a number of changes to the way that the financial services profession works. An adviser can now choose to be tied, multi-tied, whole of market or independent. A whole of market adviser can offer products from every provider but they do not offer the option to pay for their advice with a fee. An Independent Financial Adviser offers a fee charging option and this can sometimes offer greater impartiality that paying for services through commission. In any case, remember that you as the client are paying for financial advice – either through product charges and commissions or an explicit fee. Ensure that you are getting value for money.