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Even if you are not one to make New Year’s financial resolutions, 2021 may be the time to start. Last year was tough for all of us. We endured uncertainty, fear, lockdowns and missed or lost loved ones. Some lost their jobs or their livelihood, and many others felt the pain of financial difficulties. With 2020 firmly behind us and a brighter outlook for 2021, we are working with our clients to set some financial resolutions for the year and stick to them. Here are our top 6 tips to get your year off to a good start, too. For a personalised approach, talk to one of our independent financial advisers at www.plutuswealth.com.
Putting a plan together and sticking to it is always easier said than done. Most of us make New Year’s resolutions, only to forget or abandon them before January is out. Before we know it, we have fallen back into our old habits. Not this year. We are determined to help you create new and better financial habits, with these 6 steps.
Paying off debt is the most effective way to manage your finances and get them into better shape. This could be your mortgage, credit cards, loans you have taken out, or money borrowed from friends and family. Start by creating a list of all the debt you currently hold. Once you have done that, go through each item and identify:
Armed with this list, you now have a clear idea of what you owe, to whom, and how much interest you are paying. Prioritise those debts that have the highest interest rate first. You want to pay those off as quickly as you can so that you are not racking up more and more debt.
It makes more financial sense to make minimum payments for those debts that have a low interest rate and overpay on those that have a high one. This way you are paying them off sooner and incurring a lower additional debt than by paying off smaller debts with a lower interest rate first. It may feel like you are making progress this way, but you are prolonging the debt timeline. For example, paying off a credit card with a 22% APR by making overpayments while meeting minimum payments on your mortgage with a 2.5% interest rate will clear that debt off sooner. Once that is done, you can use that extra cash to make overpayments on your mortgage.
Taking those debt figures as a starting point, create a home or family budget. Plug those into a spreadsheet or a list and add all other expenses to it. Those should include your monthly outgoings – bills, membership fees, food, etc. It should also include your monthly income.
Straightaway you should be able to identify where much of your money is going. If your income is lower than your outgoings, focus on identifying where you could cut back. We are not suggesting that you give up every little luxury that makes life a little more fun. There may be areas where you could find cheaper alternatives though, or put things on hold until you pay off some debt and can get back on track.
No one wants to think the worst, but if the past year has taught us anything, it is to be prepared. While we can’t predict the next pandemic, we can put things in place to look after our loved ones.
Making a will is one of the most important things you can do. If you have any assets – a home, valuables, a business – it is worth making a will. Why? With a will you can avoid a lot of extra heartache for your loved ones, and a chunk of it attracting up to 40% in Inheritance Tax. You can find out more about reducing this in our recent article on the Inheritance Tax rules.
Once your will has been prepared you don’t have to worry about it unless something changes, such as a life event or you change your mind about your legacy.
We say this often, and we will keep saying it. Setting up a pension is critical to your financial future, both short and long term. With opt-out only pensions, it’s easier than ever to take advantage of the ‘free’ money you get from the government once you start making payments. If you are new to pensions, take a look at our article on what they are, why you need one and what’s available to get you started.
Bottom line? Unless you are struggling financially and need to prioritise debt above all else, it makes sense to pay into a pension. When you do, your employer will too, and you will also qualify for pension relief – money the government pays into it on your behalf at no cost to you.
One other pension-related resolution that we recommend is to take stock of any multiple pension pots you may have. As people change jobs and move from one company to another, different pension schemes may exist for you. Once you have stopped paying into a pension and moved on, it may not be actively managed. This means that you could be losing money if up-to-date investment decisions are not made. Talk to an independent financial adviser about reviewing and potentially consolidating old pension pots.
We often think that loyalty will pay off. Sadly, that is not always true. When it comes to insurance policies and service providers (such as for energy, broadband or mobile phones), shopping around is often more financially rewarding.
The best times to shop around are when:
Often this takes place on an annual basis. Consider adding any such dates to your budget as a reminder to start shopping around a few weeks before your rate is about to change.
Once you have got everything set up to make the most of your finances for the year, it is time to consider how to manage any surplus. It could be that you pay a little extra into your pension – remember, the government will pay in a minimum 20% tax relief on what you invest. Or you could set up a Cash ISA, either to save for something specific or as an emergency fund. You could also invest in the stock market. If you are unsure of what your options are, take a look at our article on saving vs investing, or give one of our independent financial advisers a call for some tailored advice.
Your analysis has been done, and you are all set up to make the most of your finances this year. Now comes the hard part, sticking to the plan. Here’s what we recommend to help do that:
Your budget should be a live document, something that you keep an eye on regularly. Set yourself a reminder to check it once a month. Has your income changed in any way? Have your bills gone up or down, or have you managed to pay off one or more of your debts? All these changes will affect your monthly figures. You may have a little extra to put into your emergency fund or to treat yourself with. Or you may find that you need to tighten your belt for another month; it’s better to know in advance than get an unpleasant surprise and be out of pocket.
Using your budget you should be able to set up some direct debits for most of your outgoings. We recommend you set them according to your budget calculations rather than the minimum amounts. You can then monitor them on a monthly basis and adjust if necessary once you have reviewed your budget.
Whatever stage you are at in your budgeting, our Plutus Wealth team of independent financial advisers is here to help. Drop us a line at email@example.com or give us a call on 020 7871 5200. We can help you set and stick to some good New Year’s financial resolutions for 2021.