24th November 2014
The 23-29 November marks the Institute of Financial Planning’s seventh Financial Planning Week – the purpose of which is to help consumers take action to improve their financial health. Adrian Lowcock, head of investing at AXA Wealth outlines five financial tips consumers could carry out to get their personal finances back on track in time for Christmas…
Day One – Write a budget
The aim of a budget is to know exactly where the money is going, how much is being spent on energy bills, mobile phones, the rent or mortgage and how much you have left over after all the necessities have been dealt with.
This is the best place to start as until you know what you are spending you cannot make any other plans. The best way to approach writing a budget is to treat it as a financial detox or confession: this is your chance to admit to yourself exactly how much you spend on going out, shopping and those occasional treats.
Making a spreadsheet may be the best way to keep a record of your spending as this allows you to add missed items easily and move them around into similar categories. Once you have done the spreadsheet that is your work done for the first day.
Day Two – Make a list of your objectives
This list can be as long, or as short as you like. It can include things you want to do in the short-term; such as weekend breaks away or something you want to save up for to buy, to longer-term goals such as saving for retirement or a deposit for a home. Once you have a list together go back over the list and put a timescale on each item and a cost, how much do you think that you want to spend on your weekend break or how much income do you need to retire on. The closer to retirement you are the better idea you will have on this.
Day Three – Are your goals realistic?
Time to go back to your budget and review it. How much money do you have left over each month? Are you saving enough and are you able to afford to do the things you want to do? Even if you can afford everything you want to do, your budget is likely to show some areas where you spend much more than you thought. Take a little time identifying areas where you could possibly save money, either through negotiating better rates or through changing your habits.
It is important to be realistic with any changes you make to your spending habits. It is much easier to switch mobile phone or electricity providers than it is sacrificing that Latte in the morning. Get a list of all your providers and make a note of when your insurance renewals become due or contract expires for your mobile phones or broadband.
Day Four – Cutting costs
This day you can spend going through each provider, browsing online looking for the best deals and changing your contracts to reduce your bills. Take your time and work through each bill doing research on each. Take advantage of comparison websites to find the best deal for you. When you have found a new provider, don’t stop there actually follow through with the transfer. Make a note of how much you expect to save and store the details of the contract you have found.
Once you have worked through each contract and provider, add up how much savings you are likely to make and check it against your budget. If you have saved enough to meet your goals great, if not you might need to revisit some of the contracts. For example can you cut further costs on your mobile phone package or TV bundle.
Day Five – Tax efficient saving
Now you have cut costs and found money to save you have to decide what to do with it. There are two main savings products you can use: NISAs and pensions.
NISAs: Investors and savers can put up to £15,000 each year into a NISA and the money, whether invested or held in cash, will grow free of any additional tax. You don’t even need to declare them on your tax return. The advantage of a NISA is if you need the money you can access it right away. However, if you are investing in stocks and shares you may well get back less than you invested.
Pensions: The most popular pension now is the SIPP – Self Invested Personal Pension. This allows you to save for your retirement and offers attractive tax relief for doing so. Any money placed into a pension benefits from income tax relief at the contributor’s marginal rate. Basic income tax is reclaimed by the pension administrators and gives a boost to your contribution, for example a contribution (net of tax) of £8,000 by a basic rate tax payer would be grossed up to £10,000 by the Inland Revenue.
However, by investing in a pension you are not able to access the money until you are 55 so pensions should only be considered once you have sufficient savings to protect you in an emergency – rainy day funds.