Accountants spend all their time looking after other people’s money, but sometimes their own personal finances could do with a money MOT.
Here are some quick and simple New Year Money Resolutions that you can incorporate to help make your money work harder for in 2022.
1. Clear your debt
Look at all your debts and find out how much interest you are paying on each one. Tackle the debts with the highest interest rate (known as Annual Percentage Rate) first.
Set up direct debits to pay off your credit card and household bills so you don’t miss a payment. Set aside a time once a week to review your finances and how much you are spending and saving. Make a note in your diaryfor a month before your insurance comes up for renewal, so you can shop around and find the best deals. From January 2022, insurers will have to offer the same deal to new and existing customers, so you may find that rates and premiums rise as a result.
2. Manage your spending
A very simple way to keep tabs on where your money goes and identify “leaking” cash is to keep a log of what you spend every day. You can do this on a spreadsheet, a notebook or a money management app like Emma, Money Dashboard or Plum.
You’ll be amazed how small amounts of habitual spending add up to significant amounts.
Get into the habit of saving on the essentials of life – finding cheaper petrol and combining your usual supermarket shop with a visit to one of the discount supermarkets for non-branded essentials. Cancel non-essential direct debits like gym membership and magazine subscriptions if you don’t use them.
3. Seek help if you can no longer cope with your debts
There are a number of debt charities which offer free advice and counselling. You should not have to pay for debt advice, so avoid companies which want to charge you.
4. Start to make savings
Once you have started to clear your debt and freed up more money you can begin to save. It is a good idea to think about savings in three separate pots: short term (for emergencies), medium term (for a house deposit or college) and long term (your pension and retirement savings).
As interest rates are historically low at present, so you will probably have to consider an equity-based (shares) investment for your longer term savings goals.
5. Use your ISA allowance
Sean McCann, Chartered Financial Planner at NFU Mutual, says anybody aged between 18 and 40 who is saving for a house deposit may want to consider a Lifetime ISA.
“You can invest up to £4,000 a year and get a 25% increase from the government on top,” he says.
One of the most effective medium to long term savings vehicles is an Individual Savings Account (ISA).
“You can shelter up to £20,000 a year in an ISA, and all income and growth is completely tax free. Assets can also be passed between spouses without triggering a tax bill, so between you, you can shelter £40,000 a year in ISAs,” says Sarah Coles, senior personal finance analyst, Hargreaves Lansdown.
6. Make the most of the annual dividend allowance
Everybody can receive £2,000 of dividends from shares each year tax free.
“If you receive more than £2,000 in dividends, you can transfer shares to your spouse or civil partner tax free, so that they can make use of their £2,000 tax free allowance,” says Sean McCann.
“Dividend Tax is increasing by 1.25% in April, making it even more appealing for married couples and civil partners to gift shares or investments,” he says.
7. Prepare for mortgage rate rises
The pain for around 2 million mortgage borrowers on variable rates will be swift, following the Bank of England’s interest rate rise in December 2021, says Sarah Coles.
“It’s not going to mean particularly eye-watering rises, and UK Finance figures show the typical SVR customer would pay just under £10 more a month. However, this is unlikely to be the last of the rate rises,” she says. “If rates go up to 1%, that boosts the typical SVR customer’s monthly payment by £57, which is a difficult sum of cash to find, particularly when prices are rising on all sides.”
Borrowers affected by hikes should consider remortgaging as soon as possible. In many cases a fixed rate deal looks like a sensible option, and it’s worth considering a longer fix.
“Rates had already gone up ahead of the rate rise, but we’re still around historic lows, so now is the time to act. If you’re on a fixed rate with less than six months left to run, you can book in a new rate now, so don’t wait for your deal to expire,” she says.
8. Get savvy about Higher National Insurance
On April 6, 2022 National Insurance will rise 1.25 percentage points, to 13.25% on earnings between £9,564 and £50,268, and 3.25% on earnings above this. It will have a disproportionate impact on lower earners, because it kicks in at a lower wage level than income tax and basic rate taxpayers pay a higher rate than those on bigger salaries. It also hits younger people, because when you’re over state pension age, you don’t have to pay National Insurance. It’s the first step towards the introduction of the Health and Social Care Levy the following April, which will extend the charge to anyone with earned income above working age too.
“If you’re worried about National Insurance, you can cut your tax bill and boost your pension if your employer offers a salary sacrifice scheme,” says Sarah Coles.
“These effectively cut your pay, and boost pension contributions by an equivalent amount. Because you don’t pay tax or NI on pension contributions, the full value of the cut in salary goes into the scheme. This won’t leave you better off today, because you’ll get less in your pay packet, but it means you’ll be boosting your income in retirement instead of handing over more to the taxman.”
9. Boost your pension
Saving in a pension is a tax-efficient way to save for the long term. It is a good idea to review your pension performance annually to check whether you are on course to meet your retirement needs, or whether you are saving too little, or too much and coming close to the annual “Lifetime Allowance” in pension funds. If you have the opportunity to join a pension scheme at work, you can make the most of the employer contributions as well. If you are a sole trader, a Self Invested Personal Pension (SIPP) is a good option.
10. Ensure you are properly protected
Having the correct life insurance in place is this particularly important if you have dependents. Depending on whether you have any children, you might want to write a will and set up a Power of Attorney for health and financial issues. If you have a workplace pension it may come with Death in Service Benefits for your spouse or dependants. If you are self-employed, you can set up simple life insurance cover online.
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Marianne Curphey is an award-winning financial writer and columnist, and author of the book How Money Works. She worked as City Editor at The Guardian, deputy editor of Guardian online, and has worked for The Times, Telegraph and BBC.