January is a great time of year to commit to making changes in your life. While you may already have signed up to the gym, given up alcohol or moved to a plant-based diet, getting to grips with your finances is another great way to start the New Year.
Indeed, a study by Fidelity found that almost a third of Americans planned to make financial New Year’s resolutions last year.
So, to help you, here are ten positive financial changes you can make in 2020.
1. Form a habit
Research suggests that small changes are easier to achieve than larger ones. If you commit to saving a lot more each month and find you’re not in a position to do so in February, you’re more likely to give up and not stick to your commitment.
According to James Clear, bestselling author of Atomic Habits: Tiny Changes, Remarkable Results: “Getting 1% better every day counts for a lot in the long run.”
So, if your resolution is to save more, start by increasing your saving by a small amount. Successful small changes give a sense of achievement and can build into greater changes in the future, eventually leading to the forming of new habits.
2. Build a nest egg for your child or grandchild
Whether it’s through a Junior ISA (JISA), a savings account, or through contributions into a pension, you’re probably already saving for your child or grandchild.
If you are – great! Make 2020 the year you review your savings to make sure they are on track for your goal: perhaps you want to pay for university or gift them a deposit to help them buy their first home? Speak to your financial planner to ensure you’re saving enough.
If not, make 2020 the year you start saving. A good place to begin is a Junior ISA which allows you to save up to £4,368 (in the 2019/20 tax year) for a child or grandchild in a tax-efficient way. Although parents have to open a Junior ISA on behalf of the child, anyone can contribute to a Junior ISA account making it perfect if you have a grandchild and you’re looking to top up their savings.
Cash or Stocks and Shares JISAs are available, and no personal Income Tax or Capital Gains Tax is paid on any growth. The child can take over the management of the account when they reach their 16th birthday but can’t make any withdrawals until they turn 18.
If your Junior ISA contributions are maximised and you want to consider investing for a child or grandchild over the very long term, you could consider contributing to a personal pension, although be aware you cannot normally access this until at least age 55.
HMRC estimate that there are 60,000 personal pensions in existence for children, and you can pay in £2,880 each tax year (this is grossed up to £3,600). Bear in mind that the money won’t be accessible until the child retires (which could be more than 50 years from now!) so they can’t withdraw it to pay for school fees or the deposit on a home.
3. Switch your bank account
Brits are fiercely loyal to their banks. Back in 2013, research calculated that the average person is more likely to stay with their bank than they were to stay married to their partner – by more than five years!
Even when account holders receive terrible service, they seem reluctant to switch. TSB’s well-publicised IT errors in 2018 left almost two million people unable to access their money, yet fewer than 1% of their customers decided to switch their account.
Many banks offer financial incentives to switch, and you may also benefit from better service and more competitive rates.
4. Rebalance your investment portfolio
Any investment portfolio contains a combination of different types of investment, from stocks and bonds to cash and property.
Over time, changes to the values of certain asset classes can alter the balance in your portfolio. For example, a sudden surge in the stock market might mean your portfolio is overweight in terms of equities.
When this occurs, you may need to speak to your financial adviser and rebalance your portfolio. In the example above, this may mean selling some shares and moving part of your investments into cash or bonds.
Make 2020 the year that you check your portfolio is correctly balanced.
5. Make the most of your allowances
There are dozens of tax allowances which enable you to organise your finances in a tax-efficient way. A good financial planner will help you to make the most of these allowances, which include:
- Pensions – you can contribute up to £40,000 a year (or 100% of your income) each tax year and benefit from the tax relief on offer
- Savings – each individual has an annual ISA allowance (£20,000 in 2019/20 tax year). Using your full allowance means you are maximising your tax-efficient savings/investments
- Inheritance Tax – each individual has an annual exemption which allows you to gift a certain amount each tax year (currently £3,000). This gift is then not considered part of your estate for Inheritance Tax purposes
There are other allowances you can use, from your Dividends Allowance (you don’t pay any tax on the first £2,000 of any dividends you receive) and your Capital Gains Tax allowance.
Tax rules and regulations may change in the future, so it can pay to take specialist advice if you want to explore how to use your tax allowances.
6. Check your will is up to date
Research suggests that half of UK adults don’t have a written will.
Even if you have a will in place, when was the last time it was updated? Tax rules and regulations can change, and your personal circumstances may be different since you made your will. Perhaps you have new children or grandchildren you’d like to include?
Make 2020 the year that you update your will. That way, you’ll ensure that your wishes are carried out and that your assets are passed to the right beneficiaries in a timely manner.
7. Put your Lasting Power of Attorney in place
A Lasting Power of Attorney (LPA) isn’t something to consider only as you get older.
An LPA can be put in place by anyone over the age of 18 and comes into force if you are no longer able to make your own decisions, whether following an accident or through illness.
There are two types of LPA. A Health and Welfare LPA covers your daily routine and medical care, whilst the Property and Financial Affairs LPA allows your chosen attorney to manage your finances, pay bills and collect benefits on your behalf.
Having an LPA in place gives you the peace of mind that, should you become unable to make decisions for yourself, a trusted person will do what’s right for you.
8. Improve your financial knowledge
Improving your financial literacy can help you make better financial decisions.
One easy way to improve your financial knowledge is to listen to a personal finance podcast. These can help you to learn more about matters relating to savings, investments and pensions, and can help you to better understand financial concepts.
If you’re interested in understanding how money can be used to achieve financial wellbeing and improve your life, then Chris Budd’s The Financial Wellbeing podcast is a good place to start.
The Cash Chats podcast is full of useful tips and insights while Meaningful Money is also a good source of useful financial information.
9. Pay your future self first
If you want to maintain your lifestyle in retirement you need to start planning now – however far away that might be!
In 2020, get into the habit of paying your future self first. Set up contributions to a pension as part of your monthly direct debits and make your contribution immediately after you’re paid (don’t wait until the end of the month and save whatever you have left).
10. Schedule your regular review
Just 12% of adults in the UK regularly see a financial adviser and yet research has proven the financial benefits of gaining advice.
A recent report from the International Longevity Centre (ILC), in conjunction with Royal London, found that people who received professional financial advice between 2001 and 2006 were on average £47,706 better off by 2014/16 than those who didn’t take advice.
And, the report also suggested that meeting regularly with a financial planner can lead to better financial outcomes. The study found that people who reported receiving financial advice at both time points in the analysis (around eight to ten years apart) had nearly 50% higher average pension wealth than those people who were only advised at the beginning.
Regular reviews will help you maintain focus on your long-term goals and keep on top of allowances and thresholds.
If you’d like help in achieving any of the financial resolutions above, please get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.
Please note
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
A pension is a long-term investment. The value of your investment (and the income from them) 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. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
