Every new year, millions of us resolve to make changes. Whether it’s more exercise, eating a healthier diet, or spending more time with friends and family, January is a great time to make positive changes.
In addition to making health and lifestyle changes, the new year is also an excellent opportunity to get your finances into shape. So, here are ten financial resolutions to consider for 2021.
- Budget and Plan (write things down and come back to them at the end of each month)
Budgeting is the cornerstone of financial planning. In simple terms, you should spend less than you earn and save the difference.
When it comes to budgeting, the 50/30/20 technique is a good place to start. This rule suggests that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. You should then spend 30% on wants and then spend the remaining 20% on savings and debt repayment.
The first step is to get a grip on your budget to establish where extra cash is available for you to save or invest. Also, consider transferring an amount into a savings account as soon as you are paid (the day after) – then try not to touch this amount, unless it’s necessary. This brings us to…
- Work out where you can make savings
A common trait of wealthy individuals is that they don’t waste money. So, make the new year the time you go through all your bank statements and work out where you can make savings.
Think about cancelling the gym membership you never use, the magazine subscription you never read, or the subscription TV service you never watch. You’ll be surprised how much additional cash this can free up!
- Pay off your high interest debt
Interest rates on savings products have been low for years. As of Christmas 2020 Moneyfacts reported that you would struggle to get more than around 0.6% to 0.75% on an easy access savings account. That means for every £10,000 you save you’d get annual interest of between £60 and £75.
While you may get a better return in a Cash ISA or in a fixed-term savings product, it’s highly unlikely that you’ll achieve a better return than the interest you’re paying on any debt.
In June 2020, This is Money reported that the average credit card purchase APR stood at 25.5%. On a £10,000 balance, this is equivalent to around £2,550 in interest every year.
It follows that you’re much better off trying to clear high interest debt than you are saving money in a low interest account. In simple terms: if the interest you’re paying on debt is more than the interest you’re receiving on your savings, consider clearing the debt first. Reduce debt, especially high interest versions. Debt, is the equivalent of a ball and chain on your finances. Set yourself free from bad debt.
- Ensure you have an emergency fund and a debt reduction plan in place and then consider investing.
Before you start investing your money, it’s vital that you have a rainy-day fund in place. This should be at least three to six months’ income in an easy access account that you can use in an emergency such as:
- An unexpected period out of work
- Home repairs, such as a new boiler or fixing the roof
- Repairs if your car breaks down.
Consider investing (not saving), if you feel secure that your high interest debt is clear, and you have sufficient capital for your short-term needs. Otherwise, there is a good chance that inflation will erode your buying power on your savings in the future.
- Review your will
According to the consumer group Which?, more than half the adults in the UK haven’t made a will.
Only by having a will can you ensure your wishes are carried out when you die. If you don’t make one, your assets might not be distributed in accordance with your wishes, leading to potential family disputes and animosity. This is particularly relevant if you’re in a relationship but not married or in a civil partnership.
Even if you have made a will, it’s a good idea to make sure you regularly update it to take into account marriages, divorces, and new children or grandchildren.
- Maximise your pension contributions
Each tax year, you can contribute up to £40,000, or 100% of your earnings (whichever is the lower) into a pension and benefit from tax relief.
If you’re a basic-rate taxpayer and you contribute £100 from your salary into your pension, the tax relief means it will only cost you £80. If you’re a higher-rate (40%) or additional-rate (45%) taxpayer, you only need to pay £60 or £55 respectively to achieve the same £100 of pension savings.
Even if you’re not working, you can still contribute up to £2,880 (2020/21 tax year) into a pension and benefit from tax relief, taking your contribution to £3,600.
Considering the significant benefits of investing in a pension, make sure you maximise your contributions in 2021.
- Use your ISA allowance
In the 2020/21 tax year you can contribute up to £20,000 into an Individual Savings Account (ISA). ISAs offer excellent tax benefits, whether you choose a Cash or a Stocks and Shares ISA.
A Cash ISA is a good place to build up an easy access fund and benefit from tax-free interest. A Stocks and Shares ISA also offers tax benefits if you’re planning to save for the longer term – typically five years or more.
You can also contribute up to £9,000 (in the 2020/21 tax year) into a Junior ISA for a child or grandchild under the age of 18.
Remember that the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
- Make gifts
Each tax year, individuals have a £3,000 Inheritance Tax gifting exemption. This means you can gift up to £3,000 of assets and, when you die, they won’t be considered part of your estate for Inheritance Tax purposes.
You can only carry forward this exemption for one year, so if you don’t use it, you’ll lose it. Making sure you maximise your gifting allowances can help you to reduce any potential tax bill when you pass away.
- Put a Lasting Power of Attorney in place
The last few months have shown us that it’s possible to lose the capacity to make decisions at any time. Putting a Lasting Power of Attorney in place means that a trusted person can make decisions on your behalf if you no longer can (or, in the case of financial matters, you don’t want to).
There are two types of Lasting Power of Attorney:
- Financial – this enables your attorney to pay bills, make decisions about savings and investments, and collect pensions and benefits on your behalf
- Health and Welfare – this can only be used when you lose mental capacity and your attorney can make decisions such as where you live, what you eat, and what medical care you should receive.
An accident or illness can mean you lose capacity at any time, so a Lasting Power of Attorney isn’t just for an older person. Make sure yours is in place this new year.
- Speak to a financial planner
We’ve previously looked at the value that professional financial advice can deliver. Working with a financial planner not only offers benefits in terms of pounds and pence, but a recent report by Royal London found that it can also make you more confident and secure, and improve your peace of mind and overall wellbeing.
Especially in uncertain times, a professional financial planner can provide clarity and act as a sounding board to help you avoid emotional decisions that could damage your long-term prospects. Most resolutions fail, because other priorities take over – a financial planner/ adviser keeps you on track and takes away the stress.
An initial chat is always at our expense, so please get in touch to find out more about how we can help you achieve the life you want with the money you have. Contact us today or call 01372 404417.
The above is not financial advice and we recommend that you seek advice from a suitably qualified individual before acting on the contents of this blog. Everyone has a unique set objectives and are in different situations.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.