Your New Year money hacks
First published 10 January 2017 • Updated 23 January 2017
‘Resolution’ is such a heart-sink word – they usually last about as long as it takes to say it. So we’ve come up with some hacks instead, from the casebook of Becky Sugden, Chartered IFA at Gresham Wealth Management Ltd. Time to start a fresh page.
We all know New Year is a time for setting goals and objectives. We also know how hard it is to stick to them. But your finances are an area where this can be easier, because you can see the results in hard figures at the end of each month. So instead of trying to give up chocolate or take up running, you can feel the gain instead of the pain by making small improvements to your financial arrangements.
Here are some areas to look at. On their own they might not look like much, but small changes can quickly add up into big changes in long-term outlook.
It’s the obvious things that are most often overlooked. Step one must be to look at your expenditure and identify areas where savings can be made. But look beyond the big things like your mortgage deal or household bills; there are countless small changes we can make on a daily basis, which mount up astonishingly quickly.
For example, the cost of a daily coffee is around £2.50 per day, or £50 per month. A £5 lunch every day at work adds up to £100 per month, a weekly one-person takeaway is a monthly £80, and so on. But eliminating all these non-essential outgoings would result in an extra £2,760 per year for your savings – or even more if you pay it into a pension (see below).
That’s the magic of what are known as marginal gains – small incremental improvements that together add up to a significant boost. Work these small improvements into your lifestyle and soon you’ll see only the benefits, rather than the sacrifices.
So you’ve modified your habits to generate new savings. What then? It’s tempting to use that extra money on treats such as fancier holidays. But if you’re serious about taking back control of your finances, resist that temptation for now.
The same is true if you receive a bonus or another sort of windfall. Always remember that windfalls are one-offs, and your task is to take care of yourself long-term. Any increase in income should therefore be seized as an opportunity that can make a real difference to your life. In short, you should consider channelling much or even all of it into your pension. There, it will benefit not just from long-term growth, but also from the huge boost that tax relief delivers.
It’s also worth reviewing your existing pension arrangements periodically. You need to ensure your pension fund remains competitive and suited to your needs. It continues to amaze me how often we come across pensions from previous employers that clients have simply forgotten about! Countless people have discovered many thousands of pounds essentially ‘down the back of the sofa’.
However, do be sure to take professional advice before making any pension changes. Some contracts have beneficial features such as guaranteed annuity rates, guaranteed growth rates and enhanced tax free cash entitlements, which are usually worth hanging on to. These benefits would be lost if you moved your pension to another provider.
Although current low interest rates make ISAs less tempting at the moment, from a long-term planning perspective ISAs remain an attractive proposition. A long-term investment in a stocks and shares ISA will benefit from any gains in performance in a tax free environment, and also from compound interest. Although there is no initial tax benefit to contributing to ISAs, the tax free benefit comes into its own when making withdrawals. ISAs are also more flexible than pensions, so you can use them in combination when planning for tax-efficient income in later life.
Most people do not have the time or expertise to analyse their investment portfolios. Yet this is an area that can deliver great potential returns if done right – or great losses if done wrong. We have found there is usually a trigger that first prompts someone to contact us, and sadly it is often when they have suffered the pain of making a poor investment decision. Although financial advice is difficult to quantify, the likelihood is that having a professional keeping a constant eye on the performance of your investments will ultimately leave you less exposed to losses, and more likely to make gains.
And finally… look in the mirror
Even if you have a brilliant financial adviser giving you the best advice for your personal circumstances, the only person who can actually make a difference to your long-term financial outlook is you. Take the dawning of the New Year as an opportunity to set goals – write them down and hold yourself accountable! In the long run, it’s far better value than that gym membership.
Becky Sugden is a Chartered IFA at Gresham Wealth Management Ltd.