Give your finances a spring clean
HARVEY JONES REVEALS SIX STEPS TO FINANCIAL SECURITY
dreams of financial security, but unless your lottery numbers come up it isn’t going to happen overnight.
Yet with some determination, savvy decisions and self-discipline we can all get to a place where money won’t be a relentless nightmare.
Here’s our six-step programme to overhauling your finances.
1. Control your spending
As lockdown restrictions are lifted, many will be tempted to splurge again. But while we all deserve a bit of fun after the past year, don’t get carried away, warns Zoe Bailey, chartered financial planner at planning and investment firm Tilney.
“The pandemic has shown how the unexpected can happen in a flash, so you need to be prepared,” she says.
More than half of us are worried about how much we will spend in the weeks ahead, says research by mobile money app Monese which offers an alternative to traditional banks. The app’s Sarah Holt advises examining your monthly income and essential outgoings, including regular monthly savings, to see how much you have left for luxuries.
The trick is not to blow it all at once. “You might want to head to the pub, get a haircut and go for dinner in the first couple of weeks,” she says. “But can you afford that?
“Spreading things out gives you something to look forward to.”
2. Pay down debt
It’s the four-letter word that haunts so many of us in Britain, and a real curse if it gets out of hand.
More than 14 million people have seen their income hit since March last year, according to debt charity Stepchange. It’s now too late to get a Covid payment holiday for your mortgage, credit card, overdraft and other debts, but talk to your lender if you’re struggling.
Missing payments will hit your score, and make it harder to access credit in future.
Andrew Hagger, personal finance expert at Moneycomms, says if you have several debts, target the dearest first while servicing payments on other forms of credit.
“Once you have paid that off, move onto the next.”
He advises shifting credit card debt to a zero interest balance transfer card, ensuring you clear the debt within the introductory period. If you’re still struggling, get free advice from Citizens Advice, Stepchange or National Debtline.
3. Build an emergency fund
Once you’ve cleared expensive short-term debt, start building up a rainy day fund.
Ideally, aim for enough to cover six months of living expenses in case of sickness, illness or redundancy, or unexpected costs such as car repairs or boiler breakdown.
Keep it in an interest-paying easy access account.
Around 6.6 million of us have no rainy day fund, research by Mastercard app Yolt shows, and the PANEVERYBODY demic has made their plight worse.
Around £12,500 is reckoned to be the ideal amount for a “rainy day” fund, but three out of five Brits fall short, by £8,000 on average.
Ewan Edwards, head of savings at online retail bank Aldermore, says: “Don’t just put aside loose change, try to save a set amount each month. If outgoings fall, look at raising what you save.”
4. Seek protection
We all know you must have car insurance, and we should think the same way about holiday insurance, especially with current uncertainty.
Homeowners should protect their property with buildings insurance, and everyone should try to afford contents cover.
If you have dependents, life insurance is a must in case the worst happens. Term life assurance pays out if you die during a pre-agreed term and is surprisingly cheap.
A 40-year-old non-smoker buycredit ing life insurance worth £100,000 to age 65 would pay from £10 a month, although heavy drinking, smoking or health problems would bump that up.
Combining life cover with critical illness cover – which pays out if you survive a serious illness such as heart attack or stroke – would cost from £40 a month.
Insurers Aegon, Aviva, Legal & General, LV, Royal London and Zurich offer life cover. You can get fast online quotes from comparison sites or specialists such as Lifesearch.
Also consider income protection which will cover your earnings if you are sick and cannot work.
A 40-year-old non-smoker could get replacement income of £1,000 a month for £15 to £20 a month, kicking in after three months of illness.
Emma Walker, chief marketing officer at Lifesearch, says that income protection plans vary.
“They can pay for just a few weeks or until retirement age.”
5. Build your pension pot
You’re never too young to start planning your pension. The first £1 you invest in one is the most valuable, as it has longest to rise in value.
Say you invest £100 a month at 25, and your money grows at an average 6% a year. By 67, you will have £223,809.
If you don’t start until 35, your monthly £100 will grow to just £115,612, assuming the same growth.
Many young people don’t realise this, and pay the price.
Every employee aged 22 and above who earns at least £10,000 a year should now get a workplace pension, under the auto-enrolment scheme.
If you pay in 4% of your salary, your employer must contribute at least 3%, and then the tax relief you get adds another 1%. This effectively doubles your contribution.
Resist the temptation to opt out, as you are effectively turning down free money.
Kevin Mountford, co-founder of savings platform Raisin UK, says money is tight but if you earned, say, £25,000 and invested 2% of your salary that would add another £500 a year to your pot.
“Over the years this will build up for when you’re ready to retire.”
Kevin also suggested increasing your pension contributions by 2% or 3% every year.
Saving into a pension may sound a bit boring so try to imagine what you can do with this money.
“Think of it like saving for a holiday. You could use the money to go on a cruise and see the world after you retire,” he says
Invest tax-free using your annual £20,000 ISA allowance, or make pension contributions and claim tax relief on top.
6. Have a plan for later life
If you die without an up-to-date will, your final legacy could be family arguments and disputes.
Chris Hardie, financial planner at investment management firm 7IM, says even though nobody likes to think about their death, planning for it can save them and their family emotional and financial stress.
He advises talking to your family, and making sure they’re clear about your wishes – and set up a Lasting Power of Attorney as well.
This allows a trusted family member or friend to make financial decisions on your behalf if you lose your mental capacity.
“By putting this in place when you still can, you and your family will know what to do,” says Chris.
Finally, consider how to pay the bill if you need long-term care in your final years.