Ten steps to improve your finances
Now we are beginning a new tax year, why not treat this as an opportunity to improve your financial situation? NW Brown suggests ten ways to help you get your affairs in order.
1. Put Together a Budget
The first place to start is to get a grip of your current situation, and compiling a list of your regular outgoings can help you determine the areas where you may be paying more than necessary.
This may include utility bills which could be cheaper elsewhere, direct debits for services you do not use, or spending on luxuries that you do not need. It is worth checking whether your providers for phones, internet, utilities etc. will offer a lower rate, or if their competitors can do the same for less. In December 2017 Ofgem reported that 57% of households use energy suppliers’ standard variable tariffs, with average overpayments made of approximately £300 per year.
For this exercise, looking through bank statements over the last three months should give you a good feel for your average spending habits. You may be surprised what you find out, and even small reductions in expenditure can help in big ways over the longer term.
2. Tackling Debts
If you have any debts, pay close attention to the terms, such as rates of interest and time remaining.
If you have excess income, and the interest of the debt exceeds returns you could get from savings, it is worth considering paying them off earlier, as in the long run you could be in a better position.
Check whether there are early repayment charges, but do not necessarily be put off by them – if the charge is still less than you would pay in the course of the debt you may still be in a better position by paying it sooner.
You could alternatively look to change the terms of the debt. Credit cards, for example, will often have favourable interest rates for a period upon opening an account and allow transfers from previous balances. This can enable you to pay the debt while rates remain low.
3. Saving Regularly
If you have capacity to save, it is always worth doing. Making it a regular habit will help you consider it a necessity in a similar way to your other regular outgoings.
Even putting small amounts aside can add up greatly if done consistently, and are enhanced by the effects of cumulative interest. For example, here is a comparison of how much capital is saved if a 20 year old saved £6,000 per annum to age 35, compared to a 30 year old saving £6,000 per annum to age 60, and a 50 year old saving £32,000 per annum to age 60, based upon an annual investment return of 5%.
As illustrated here, you would need to invest double the amount from age 40 to reach the same point at 60, compared to someone saving from age 30. It would then take 2.5x that amount if saving from age 50. Neither of these three would reach a 20 year old who saved regularly to age 35. In other words, the earlier you start saving, the better.
When deciding where to save you must consider to what end you are saving for. If it is for expenditure in the short term (one to five years) it is not generally advisable to invest, as it may lose value in that period due to the volatility of the stockmarket. If it is for a longer term then investing may be more suitable.
Similar to managing your budget, it is worth shopping around for savings accounts to find the best interest rates available. Some accounts offer favourable starting rates, so keeping them under review and transferring to a new account once those terms end could benefit you greatly. Be sure to check independent reviews and reputable price comparison sites for offers available.
Investments require more time and expertise, and capital risk increases if not researched properly. It is therefore worth seeking advice for longer term savings, and this is a service our Wealth Managers are able to provide.
4. Use Your Allowances
There are a wide range of allowances you may use each tax year, and by utilising them you can place more of your wealth in a tax efficient environment and make your money work harder for you.
You can place £20,000 in an ISA for 2018/19, which will provide tax free growth and income.
Junior ISAs (JISAs) are available for those under 18, with an allowance of £4,260 for 2018/19.
You can also make tax-relievable contributions into a pension ranging between £3,600 and £40,000 for 2018/19, and it can be possible to use hitherto unutilised allowances for up to three previous tax years. It is important to note that the precise amount available will be based upon your individual circumstances.
For a further explanation on the pension allowances, and an outline of the many other allowances and reliefs available, please refer to our ‘End of Year Checklist’ here, which applied to both the previous and current tax year.
5. Employment Benefits
If employed, it is worth checking what benefits are available from your company.
Many companies offer greater employer contributions for pensions than the minimum required under auto-enrolment. Often employer contribution levels are linked to the amount the employee contributes, and as a general rule, if you can afford to, it is advisable to increase your employee contributions to obtain the maximum from your employer.
Employers may also offer insurance, such as life or critical illness cover, income protection, and private medical insurance, which can sometimes be extended to your partner or dependants. While some of these may be taxable as ‘P11D’ benefits, if this is a priority to you it is worth the consideration, as it is often cheaper than setting these up personally.
Insurance can provide peace of mind and protection for when you or your loved ones are at their most vulnerable.
Protection can provide a lump sum, regular income, or both, if you become unable to work, become critically ill, or pass away. While it could be for a host of needs, many common areas include paying off the mortgage, providing regular income to meet outgoings, or paying inheritance tax liabilities.
It is extremely important to pay attention to the terms of the policy, such as when and how much it will pay, how the premiums are funded and whether it would benefit from being placed in a trust arrangement to ensure it is outside of your estate.
If you are considering arranging insurance, professional advice is vital to ensure you obtain an arrangement most suitable to your needs and interests, and we would be happy to speak with you about this.
A valid Will is crucial to ensure that your wishes are respected in the event of your death.
Even if you believe your affairs to be relatively simple, the laws of intestacy which apply if you do not have a valid Will can result in unnecessary tax liabilities or loved ones not being adequately provided for.
It will also provide clarity, and save time for the Executors of your estate as they manage these affairs.
To ensure that your Will is validated effectively, and that you have considered all the options available to you when arranging it, it is advisable to consult a solicitor. Solicitors will not only have experience in tailoring Wills to their client’s objectives, but can provide useful guidance to Executors.
If you already have a Will it is important to review it as it may no longer reflect your current wishes or situation, or have been made invalid. Important to note, for example, is that marriage or civil partnerships will invalidate any previous Will you have arranged.
8. Lasting Powers of Attorney
Arguably more important than a Will, is a Power of Attorney, which is often overlooked when planning one’s estate.
A Lasting Power of Attorney grants the authority for a person to manage your affairs on your behalf, in the event you lose the mental capacity to manage them yourself. These can either be arranged for financial affairs, health and welfare, or both.
Making or registering a Lasting Power of Attorney before an event reduces your capacity is key. While your loved ones can obtain authority to act for you once you are incapacitated, this can take time, and in the interim period assets in your sole name cannot be accessed.
This can be arranged alongside your Will, and it is highly advisable you consult a solicitor to ensure it is correctly carried out and registered.
9. Estate Planning
Once you have your own affairs in order, you can look at the methods of passing on wealth to the next generation.
There are multiple allowances which enable you to pass on gifts in your lifetime without an immediate Inheritance Tax liability, and to reduce the value of your estate.
We have provided an outline on those allowances available here, and if you are considering your options to provide for your loved ones we would be happy to speak with you.
10. Speak to Us
While there are many areas outlined above which you can do yourself, there are a lot of considerations to take into account, and it is important that you are made aware of all of your options and their consequences.
Our Wealth Managers provide a holistic service, which encompasses all of these considerations, and deliver advice tailored to your individual circumstances and objectives.
We are very happy to have a conversation with you to see how we may help. As Independent Financial Advisers we are not tied to any providers or services, and instead consider only what is best for you.
For more information please contact your Wealth Manager, or alternatively call us on 01223 720 208.
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NW Brown offers bespoke wealth management and employee benefit services to individuals, corporate bodies and not-for-profit organisations.