Even if you have a great financial plan, it must be updated regularly and for you to understand your financial goals. This ensures it reflects any life changes. But what should your priorities focus on now? Is it time to turn your attention to your pension, ISA, mortgage, or something else?
Should you consider investing more in your children’s schooling or university education? Or what about putting an estate plan in place? And then there are those previous company pension schemes to review. Is it three or four? Or was it five?
If you’re unsure what diagnosis to give your current money situation. Maybe it’s time to have a financial health check. But where do you start?
Look to reduce your debts
You need to know exactly how much you owe, how much interest you are paying, and to whom. Suppose you already have a credit card or loan with a company. In that case, it is unlikely to allow you to take out a further loan or credit card to consolidate your debts. And you could end up with a rejection footprint on your credit record that will deter other lenders. If your debts are restricted to one or two credit cards incurring interest, the cheapest option is probably to transfer the balances to a zero-interest credit card deal.
Suppose your debts are too large to move to one credit card account. In that case, you could transfer as much as possible to a zero-interest credit card deal, pay the minimum allowed on this account, and concentrate on paying the more expensive debt you could not transfer. Alternatively, you could apply for a personal loan to cover the entire amount. Once you have added up all the debt, work out how much you can reasonably afford to pay off each month.
Track your spending
Without a budget to monitor your spending, you won’t be able to track where your money is going. When you feel financially out of control, the knee-jerk reaction is to cut back. Your budget will ensure that your money does what you’re telling it to do. Tracking your finances gives you a baseline to help track your progress and allows you to see spending mistakes before they become disastrous personal finance problems. Once you follow your expenses, you’ll find that the process makes you more mindful of your spending choices throughout the day.
One of the most significant sources of financial stress for some people is the eternal question of where all the money went. By tracking all of your expenses rather than feeling as though everything is out of control, you can transform the question into one of personal decision-making – something that’s far less stressful. In short, tracking your expenses gives you control over your finances, and you’re no longer alone on a financial roller coaster. There are several different iOS and Android budgeting apps that have been designed to help you keep track of your finances from your phone.
Use tax allowances
For the 2023/24 tax year, there are a number of allowances to make use of – the tax year runs from 6 April to 5 April. The Income Tax personal allowance, which is the amount you can earn tax-free before you start paying Income Tax, is £12,570.
The tax-free dividend allowance is £1,000 for the 2023/24 tax year. On dividends above the £1,000 threshold, basic-rate taxpayers pay 8.75% tax, and higher-rate taxpayers pay 33.75%. Additional-rate taxpayers will be charged 39.35% tax on dividend income over the allowance. The dividend tax does not apply to investments in an Individual Savings Account (ISA) or a pension.
Every year you can take advantage of your Capital Gains Tax allowance. In this current 2023/24 tax year, you can make gains of £6,000 before you start paying Capital Gains Tax. Lower-rate taxpayers pay a 10% tax on capital gains, and higher and additional-rate taxpayers pay 20%. The only exception is for second properties, including buy-to-let investments. Capital gains on these investments will be taxed at 18% for basic-rate taxpayers and 28% for higher and additional-rate taxpayers.
Pension contributions receive full Income Tax relief; this means it costs basic-rate (20%) taxpayers £80 to save £100 into their pension, while higher-rate (40%) taxpayers only need to pay £60 to save £100. The lifetime pensions allowance for the 2023/24 tax year, in line with inflation (Consumer Price Index), now stands at £1,073,100.
Most people are allowed to contribute up to £40,000 into their pension in 2023/24, known as the ‘annual allowance’. For the ultra-high earners who earn an ‘adjusted income’ of over £240,000, the annual allowance tapers by £1 for every £2 of income to a minimum of £4,000 per year – the taper threshold is currently £240,000.
You can save £20,000 in an Individual Savings Account (ISA) this tax year, where all your earnings will be tax-efficient. You won’t pay Income Tax, dividend tax or Capital Gains Tax on any investments you hold in an ISA. The limit applies to Cash ISAs, Stocks & Shares ISAs and Innovative Finance ISAs, and the allowance can be spread among the three types.
You can save £4,000 each financial year into a Lifetime ISA, which can be used towards buying a first home or retirement. If you’re looking to buy a home, there’s also the Help to Buy: ISA, which is no longer available for new savers. Those who opened a Help to Buy: ISA before the ISA closed to new savers in December 2019, can save up to £3,400 in the first year and then £2,400 each year afterwards.
The Junior ISA allowance for the 2023/24 tax year is £9,000. This same limit applies to Child Trust Funds (CTFs), which have risen yearly in line with inflation.
Basic-rate taxpayers can now earn £1,000 from savings before they start paying Income Tax on savings income, and Higher-rate taxpayers start paying tax on savings income over £500. There is no savings allowance for additional rate taxpayers.
Start a new Habit
Regular monthly investing encourages saving discipline because it shows how little sums saved over time may grow into sizable nest eggs. People who don’t have a lot of money to invest at once or who are more cautious about investing a single sum and prefer to drip-feed their money into the markets typically opt for regular payments.
When markets are choppy, as they were last year, investing on a monthly basis can be an especially beneficial strategy.
In times of high volatility, a monthly direct debit can be extremely helpful because it removes the emotional component of investing.
Investing on a monthly basis also means that you won’t see as much of a shift in the value of your investment, which might aid in maintaining your attention on your long-term objectives.
Your recurring payment will buy additional units if there is a market correction. You will also acquire fewer units as the market grows, but the units you already own are worth more. This averaging of costs over time is referred to as “pound-cost averaging.” You can vary the size of your regular savings as your circumstances change.
Ideally, it would help if you looked to increase the amount as your salary increases, but you can reduce it should your income fall.
Consider topping up your pension
To get the income you want during retirement, it’s essential to regularly review the contributions to your retirement savings. However, you need to take into account that, over the long term the impact of inflation can erode the value of your contributions, so it’s important to review them regularly.
A pension is one of the most tax-efficient ways to save. Topping up your pension helps your financial security in retirement, and saving a bit more now could make a big difference to your future. How the tax relief is given will depend on the type of pension scheme you’re in and whether you use salary sacrifice.
Many pensions allow you to choose to increase your payments each year automatically, say by 3-5%. They’ll likely stay in line with inflation without worrying about it, and you should consider a more significant increase if you receive a pay rise.
Focus on your Financial Objectives
Failing to plan is planning to fail. How often do you set financial objectives? How often do you revisit your list of financial objectives? We all know that setting goals are essential, but we often don’t realise how important they are as we continue to move through life. Focusing on your financial goals can help ensure you aren’t distracted by current daily events so that they don’t prompt you to veer off course.
Financial planning is about setting short, medium and long-term financial goals and creating a plan to meet them. A solid understanding of your finances and how to reach your goals is essential. Setting goals helps trigger new behaviours, helps guide your focus, and helps you sustain that momentum in life.
How will your life be different in a year? Do you have the security of knowing where you’re heading financially? Are you going to be able to maintain your current lifestyle once you stop working?
Have you made sufficient financial plans to live the life you want and not run out of money? Do you have a complete understanding of your financial position? What is ‘your number’ to make your current and future lifestyle secure? You will likely reach your goals when you focus on what you want to achieve.
Stick it out
Don’t let unforeseen circumstances affect your financial objectives. There will always be some bumps along the way as you invest for your future, but as volatility emerges and emotional anxiety sets in, this can lead you to veer towards ‘flight’ instead of ‘fight’.
Now is the time to improve your relationship with money and its role in your life, to seek a happier, more fulfilled existence. Instead of making knee-jerk reactions, it’s important to take time to consider your long-term plans and take deliberate steps that can further your long-term goals.
Broaden and diversify your investments
Take the time to review your investments and look for opportunities to diversify. Your investment strategy now could determine your financial success for years to come, which is why it’s crucial to have a broad, diversified spread of investments. Diversification can be summed up as:’Do don’t put all your eggs in one basket. If one investment loses money, the other investments will make up for those losses.
You diversify by investing your money across different asset classes, such as equities, bonds (also referred to as ‘fixed income’), property and cash. Then, you diversify across the different options within each asset class. Diversification lowers your portfolio’s risk because other asset classes do well at different times. It is your best defence against a single investment failing or one asset class performing poorly. Having a variety of investments with different risks will balance out a portfolio’s overall risk.
Keeping your emotions in check
Remember, as the old investment adage goes, it is ‘time in the market, not timing the market’, which is typically key to long-term gains. Shock events such as the COVID-19 outbreak and related stock market volatility can cause investors to act on their emotions.
Putting a plan in place when markets turn south and reviewing that plan when emotions are running high can temper this impulse. Although short-term volatility swings can be difficult to stomach, long-term investors need to persevere.
While it may be tempting to pull out of investment markets, you may miss out on a potential market rebound and opportunity for gains while you’re on the sidelines. During any period of volatility, thinking about your reasons for investing and what you ultimately plan to do with your money is essential.
Reinvesting dividends is one of the most powerful tools for boosting returns over time.
You can dramatically increase your annual returns and total wealth when you reinvest dividends. When an investment you own pays dividends, you have two options: either take the money and use it as you would any other income or reinvest it.
Although having the extra money on hand may be appealing, reinvesting your dividends can pay off in the long run. When you eventually reach the stage where you’d prefer to use your dividends to supplement your income, you can stop reinvesting them and start spending them!
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