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Reviewing your Financial Goals can give you peace of mind.
You might have a good financial plan, but it must be updated regularly to reflect your priorities and any life changes. But what should your priorities focus on now? Is it time to turn your attention to your pension, ISA, life cover, or maybe something else?
Should you consider investing more in your children’s future schooling or implementing some tax planning? Then there are those previous company pension schemes to review—is it three, four, or five?
If you’re unsure what diagnosis to give your current financial plan, it’s time for a financial check-up. Knowing where to start is key.
1. Reduce Debts
You need to work out exactly how much you spend, how much debt you have, and the rate of interest you pay. Suppose you have credit card debt or a loan from a bank. In such a situation, it is unlikely that you will be permitted to acquire another loan or card to merge your debts. This could lead to a rejected application that will negatively impact your credit score and hinder future borrowing opportunities. If you only have debts on one or two credit cards with interest, transferring them to a zero-interest credit card deal is likely the most cost-effective choice.
If your immediate debts are too high to transfer to a single credit card, consider transferring as much as possible to a lower interest rate. Focus on paying off the most expensive debt first, that couldn’t be transferred while making minimum payments on the zero-interest card. You might also consider applying for a personal loan to settle the total sum. After calculating all your debts, establish a monthly payment amount you can manage.
2. Budget and Track Your Spending
Without a monthly budget to monitor how much you spend, you cannot track how much money you have. When you don’t have a plan of action, you may feel financially out of control. The knee-jerk reaction is to cut back. Your budget will ensure your money does what you want it to do. Monitoring your financial obligations provides a foundation for monitoring progress and enables early detection of spending errors before they escalate into serious financial issues. Regularly tracking expenses promotes greater awareness of spending decisions.
Financial stress often arises from not knowing where money has gone. Tracking expenses helps you make the best decisions and reduces stress, giving you control over finances. Budgeting apps on Apple and Android can help manage finances conveniently on mobile devices.
3. Use Tax Allowances
Each Tax Year, there are several benefits and allowances to use. The tax year runs from 6 April to 5 April. The Income Tax personal allowance is the amount you can earn tax-free before you start paying Income Tax.
If you own your own business and shares that generate dividends, you will have an allowance on which no tax is due.
The dividend tax will be due above the allowance. The level of tax will depend on your income.
Every year, you can take advantage of your Capital Gains Tax allowance. You can make gains before you start paying Capital Gains Tax. Basic-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 are eligible for Income Tax relief. It costs basic-rate taxpayers £80 to save £100, while higher-rate taxpayers only need to pay £60 to save £100.
The maximum pension contribution level is £60,000 each year into a pension, known as the ‘annual allowance’. For those earning over £240,000, the allowance decreases by £1 for every £2 of income until reaching a minimum of £4,000 per year. The threshold for this taper is currently £240,000.
You can save a total of £20,000 in an Individual Savings Account (ISA) this tax year, where all your earnings will be tax-efficient. You won’t pay Income, dividend, 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 a year into a Lifetime ISA, which you can use towards a house deposit.
Basic-rate taxpayers can now earn up to £1,000 from savings before paying tax on savings income. Higher-rate taxpayers start paying tax on savings income over £500. There is no savings allowance for additional rate taxpayers.
4. Set Up An Emergency Fund
Setting up an emergency fund is essential for financial security and peace of mind. You can avoid debt and financial stress by creating a safety net for unexpected expenses such as medical emergencies or job loss.
Start by determining a realistic amount to save each month and setting up a separate savings account for emergencies. Remember, being prepared for the unexpected is better than facing financial difficulties. By taking proactive steps now, you can ensure your financial stability. A good rule of thumb is to have between 3 and six months’ worth of living expenses.
5. Top Up Your Pension and Retirement Plans
To achieve the desired income in retirement, it is crucial to assess the level of pension contributions frequently. It is essential to be aware of the impact of inflation on your wealth and review your contributions regularly.
A pension is one of the most tax-efficient ways to save. Topping up your pension will help improve your financial well-being and help you to generate retirement income when you stop working.
Retirement savings can make a big financial difference to your future. How the tax relief is given will depend on the type of pension scheme you’re in and whether your employer allows salary sacrifice. For example, a personal pension will have basic tax relief deducted from the contribution.
Some pensions allow you to increase your monthly payments by 3-5%. They’ll likely stay in line with inflation without you having to worry about it. You should consider a larger increase if you receive a pay rise.
6. Focus On Your Money Goals
Not planning is preparing to fail. Do you regularly set short-term goals? Do you frequently check your long-term goals? We understand the significance of setting goals but may not fully appreciate them daily. Concentrating on financial goals can prevent distractions from current events to keep you motivated.
Financial Planning is about setting short—or long-term goals and any other goals you need to consider. It is important to have good insight into your finances and how to achieve your ambitions and goals. Setting ambitious goals helps trigger new behaviours, help you focus, and sustain momentum in life.
Will your life be different in a year? Do you have the security of knowing where you’re heading financially? Will you have enough money and be able to maintain your current lifestyle once you stop working?
Have you made adequate financial arrangements to live the desired lifestyle without running out of funds? Do you fully comprehend your financial situation? What is the figure needed to maintain your present and future way of living? Having a clear focus on your goals increases the likelihood of achieving them.
7. Stick It Out
Now is the opportunity to improve your relationship with your personal finances and their role in your life, to seek a happier, more fulfilled existence. Instead of making a knee-jerk reaction, it is vital to carefully think about your future plans and take intentional actions to advance your future objectives.
8. Broaden Your Investments
Take the time to review your investments and look for opportunities to diversify. Your investment strategy will determine your financial success in the coming years, so having a broad, diversified spread of investments is important. Diversification can be summarised as ” Don’t put all your eggs in one basket”. If one investment loses money, the other will compensate for those losses.
You diversify your funds among various assets like stocks, bonds (known as ‘fixed income’), real estate, and cash. Within each asset class, you further diversify across different options. Diversification reduces the risk of your investment portfolio as different assets perform well at certain times. It is a key strategy to protect against the failure of one investment or underperformance in a particular asset class. Mixing investments with varying risk levels helps maintain a balanced overall risk in your portfolio.
9. Keep Calm
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 caused investors to react to 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 changes are difficult to stomach, long term investors must persevere.
It may be tempting to withdraw from investment markets, but this could lead to missing out on potential market rebounds and opportunities while sitting on the sidelines. In times of market volatility, it is crucial to consider your investing goals and long-term financial plans.
Contact a Financial Adviser
Contacting a financial adviser or a financial planner can be a great first step to maximising your financial situation. Whether preparing for retirement, investing in stocks, or helping with your financial ambitions, a skilled financial adviser can help you put together a Financial Action Plan for you. With their knowledge and experience, they can help you navigate the complexities of the financial world and make informed decisions for a secure financial future. Don’t hesitate to contact a financial adviser today for personalised advice and support.
Conclusion
Reducing debt is essential to achieving financial stability and reaching your large goals. By carefully reviewing your financial objectives and assessing your current situation, you can create a plan to pay off debts efficiently and effectively. It is also crucial to seek guidance from a trusted financial adviser who can provide tailored advice and support to help you make informed decisions about your financial future. These steps will put you on the right path towards achieving financial freedom and security.
Consilium Asset Management are Financial Advisers in Bristol
