After you’ve gorged on turkey, Christmas pudding and mince pies, opened your presents and watched the inevitable reruns of perennial Christmas favorites on TV, your thoughts might drift to 2013 and what the New Year has in store.
Why not take some time over the break to plan your finances for 2013? Our six financial resolutions should give you some inspiration.
1. Set your goals
This doesn’t have to be as grand as it sounds, but as we start the New Year, think back to the turn of the millennium, where were you? Feels like yesterday doesn’t it? Well its 12 years ago!
That’s 12 years closer to retirement, to when you when your mortgage is due to be repaid, and to when your children will go to university. You get the picture, time flies, which is why it’s important to set financial goals and try and stick to them.
Think about what’s important to you, then fast forward to the end and plan backwards. How much capital will you need? When will you need it?
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Once you know the answers to these two questions you can start to plan. How much do you need to put away each month or each year? Will you save or invest? What rate of return will you get? What rate of inflation do you factor in?
All of these things need to be considered and it isn’t easy, of course our advisers are here to help and there are some great financial calculators on our website which can help you with your planning.
The keys to success are setting goals which are specific, easy to measure and crucially realistic and obtainable, anything other probably means you will give up some way short of your goal.
2. Take care of the basics
Even the best laid plans can be blown off course when things go wrong, it’s therefore crucial to take care of the basics.
These are pretty obvious, but so many people don’t do them:
- Make a Will. It’s the only way of distributing your assets on your death in accordance with your wishes, it’s also especially important if you have children
- Build up an emergency fund. The average person in the UK has only around £1,000 in savings accounts, building up a fund to help cope with the unforeseen events life throws at you is crucial and certainly better than a payday loan!
- Check your protection. How would your financial dependents cope if you were unable to work due to accident or illness, or worse, die? Are you financially dependent on someone? How would you cope if their income suddenly stopped? We know that arranging Life Insurance, Critical Illness Cover and Income Replacement is hardly the most exciting of subjects, but it’s a crucial part of financial planning
3. Check your credit file & reduce your debt
If you have debt or are planning on taking out a mortgage in the future, it’s probably worth taking a look at your credit file to make sure everything is as it should be. There are plenty of services offering this, such as Experian, Equifax, and Checkmyfile.
If you have debt, whether it’s a mortgage on your home, a buy to let mortgage or unsecured debt in the form of a personal loan, credit card or store card, review it to make sure the interest rate is as competitive as possible. If you can pay less interest by moving the debt elsewhere, then go for it, but remember to factor in any arrangement or transfer fees, such as those often charged by interest free credit cards.
It also makes sense to try and reduce unsecured debt as quickly as possible. Especially if the interest rate is higher than the return you can reasonably expect to get from your savings accounts or investments.
4. Review your expenses
Sit down and look through your last six months bank statements. Is there any expenditure you could cut out? Are there bills you could reduce by looking at alternative options? Are you really using that gym membership? Do you need that insurance which seemed like a good idea last time you bought a computer?
We really don’t want to patronise, but when was the last time you sat down and really analysed where your money goes?
If you’ve followed step one, you will have a list of financial goals. Like most people you will probably have a limited budget, if you can review your outgoings and save money, this could release much needed income to help you hit your goals.
5. Plan properly for retirement
You’ve set your goals, taken care of the basics, and cut out any wasteful spending; now the proper planning can start.
Most of us want to retire at some point in the future, sit down and think about when you would like to finish work and how much you would like to live on. Remember inflation, a £20,000 income today, will not be worth the same when you retire.
Once you’ve decided on your target income, deduct the State Pension you can expect to receive, the figure you are left with is your income shortfall. All you need to do now is create a pot of money large enough to provide that income, in a sustainable way, easy!
Our online financial calculators can help you calculate the lump sum you need. Then remember to deduct any existing pensions and you will be left with a figure, probably quite a large one, that’s called your capital shortfall and is the amount you need to build up between now and your chosen retirement age.
The capital shortfall is often large, but don’t be too scared. You don’t have to tackle it all at once and remember there is help available along the way in the form of tax relief on pension contributions. Also, if you are employed, there may be a work place pension available into which your employer will make contributions. If there isn’t one currently available there soon will be under the new Auto Enrolment program.
If this all sounds too complicated and daunting, don’t be put off, have a chat to our team of advisers, they will be happy to help you put together a retirement plan that works for you.
6. Review your savings & investment strategy
There will almost certainly be other calls for capital lump sums between now and retirement, especially if you have children. The cost of a university education is rising whilst more and more children are visiting the ‘bank of mum and dad’ to help with their first house purchase.
Also, there are times when you should use other vehicles, other than a pension, to save for retirement.
So as part of package of New Year financial resolution take some time to review your savings and investments.
- Are your savings and investments held in the most tax efficient way? For most people this means starting with an ISA (Individual Savings Account). If you have money not wrapped in an ISA then address this as soon as possible, you are needlessly paying tax
- Decide whether you are a saver, an investor, or both. Savers generally accept a lower rate of growth, and the risk of inflation eroding their capital, in exchange for capital security
- Investors are prepared to accept a degree of capital risk, in return for hopefully better returns. As a rule of thumb, if you can’t tie up your capital for at least five years you should use savings accounts, for longer periods consider investing in line with your attitude to risk
- The process of planning is the same, calculate how much you need, then use one of our online calculators to work out how much money you need to put aside each month or year
Next steps
As any business coach will tell you, whether you follow one or all of our New Year’s resolutions isn’t really important. What is vital though is that you set realistic and achievable goals, otherwise you will never see them through, and you’ll end up in the same position you were this time last year, or indeed 12 years ago at the start of the century.
Our team of Independent Financial Advisers in Nottingham are experienced in helping our clients achieve their goals, if you would like help with yours then call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
The Financial Services Authority does not regulate will writing.
