How to spring clean your finances ?
Most people see the time of January as a time to reflect on their current personal position. Whether that relates to finance, health, goal setting and aims for the year.
However the idea of changing your financial situation for the greater good can appear daunting or complex to the vast majority of people.
The subject should be considered relatively simple and easy if you create an action plan and get organised.
So what simple steps can we take ?
1) The first step is get all your paperwork in place and create a list of all your assets, savings and liabilities that you own. If may be that your financial affairs appear very simple due to you limited number of financial products.
But it may be have you have numerous accounts, whether this may be savings account, bank accounts, credit cards etc, which may appear somewhat daunting to keep track of and manage.
Do you find yourself struggling to manage numerous passwords. Or do you have a mass of paperwork from various financial institutions.
So what we do to simplify matters, if may be that we create the following ?
1 current account for everyday needs, and to cover essential costs by direct debits and standing orders.
1 credit card to cover unexpected costs, holidays or major purchases.
2 savings accounts, 1 solely for an emergency fund and 1 for savings
1 Cash ISA and 1 Stocks & shares ISA, to cover our investment needs. People may not want all accounts with the same organisation so eggs aren’t all in the same basket or company.
Savings accounts are currently protected to £ 85,000 per institution, (as per January 2024) by the FSCS (Financial Services Compensation Scheme). Most people will normally have savings well below that current limit.
As our level of financial expertise and awareness grows it may well be that you create new accounts for different asset classes. The aim at first is to try and declutter your financial affairs and simplify your life.
What about your Pensions ?
Have you stayed at the same employer for the whole of your working life, or do you change jobs or careers every few years.
Many years ago people were enrolled into final salary schemes for the whole of their career. Now people move jobs regularly, but are usually automatically enrolled into a Defined Contribution (DC) pension by their employer. As this was introduced into the workplace from 2012.
Whereby an employer and employee will both make contributions to build up a pension pot for retirement at a later date. Currently age 55 due to the MPA (minimum pension age) although this will increase to age 57, in April 2028.
But do you have track of all your pensions ?
- Do you know which providers are looking after them ?
- What known values are attached to them ?
- Has your pension got a selected retirement date ?
- Are there any special features or benefits are attached to them ?
- What fees are applicable and how are they performing. Are they making or losing money or are they being eating away by fees and charges.
If so do you then take some steps to review your pension arrangements. Is is possible that you transfer them together to consolidate and simplify them to make them easier to manage. Or can you manage them in the current format ?
Create an emergency fund
When starting out you should ideally create a buffer zone or level of comfort to meet any unexpected costs. This could be a boiler breakdown, home repair, car breakdown, medical emergency. By having a back up fund easily accessible in an instant access account, it can avoid any undue stress or worry about having to find money instantly to meet these costs.
Try and avoid the need for expensive loan or credit facility subject to excessive rates of interest. Or putting onto a credit card and then paying interest over the next few months to try and settle that outstanding amount of credit.
So how much should we hold in an emergency fund ?
I myself like to hold a minimum of £ 1,000 to cover any unexpected costs, but we do hold cash in my wife’s name also which acts as double level of protection.
Generally, most advisors will say you need enough to cover 3 to 6 months expenses. This may seem out of the reach of most people who have little savings or may be living paycheck to paycheck. However, the idea may to be build up over a period of time.
Learn to get into the habit of savings regularly, so lets say every payday or the 1st of each month. So that you set aside somewhat, it may start off small, but as your fund grows it will incentive you to met your required target.
Any amount you set aside is a bonus, and you will be amazed by the power of compounding through making regular contributions each month.
Set a budget & track your spending
Keep a record of all your income and expenditure during the month, but do it over a 3 month period. So you can see a average of your incoming and outgoings for that period. Patterns may emerge on what you are spending the vast majority of your income on.
It may be housing costs make up the biggest item of expenditure. So lets say monthly mortgage costs or rent, but break it down into certain categories such as :
1) household bills – gas, electricity, water, council tax, insurance, tv and broadband costs.
2) household food, eating out, drinking & socialising, lunches at work, daily coffee etc.
3) entertainment, such as days out, movie nights, netflix, spotify, mobile phone, gym memberships, leisure and sports fees etc.
4) car – petrol, mot, road, tax, repairs and servicing, breakdown cover, car finance, or commuting to work.
5) Debt – do we have any outstanding finance eating away at our monthly expenditure. Such as bank loans, HP, credit cards, buy now pay later etc.
6) Weekends away, holidays, family celebrations and birthdays. Or what about the amount you may set aside for Christmas presents and parties.
What are unscheduled or surprise costs ?
You will be surprised at where you money will go, and these all add up over the course of each month. Are there any areas where you can save money, by cancelling unnecessary subscriptions. Or what about shopping around to get cheaper food through a different supermarket. Could you save money by shopping for deals through comparison websites.
Or what about reviewing existing packages or deals in place, check what rates and fees you are paying. What dates do certain things automatically increase such as mobile phone, council tax, entertainment subscriptions. If so are you aware of when these annual price increases are implemented. So you can meet those costs and avoid any unpleasant expense or shock.
Once you have an idea of your monthly outgoings, create a budget and try and stick to it. Aim to make savings to improve your financial position.
It will pay off in the long run and reward you handsomely in the short term, as your financial situation improves.
Try and cover all essential items of expenditure such as food, shelter and transport. We need to set aside amounts for non-essential items which may be considered as discretionary or luxury items.
Remember small changes can make a big difference.
Learn to manage debt
The aim is to try and avoid all unnecessary debt, it will only make somebody else richer on your behalf.
There are considered to be 2 types of debt:
Good debt:
A good debt may be your mortgage as it will usually be a lower rate, with the aim of paying of a property over numerous years. At the same time as the property hopefully increases in value over the period that you own it.
Rates have been extremely low for the past decade at rates around around 2%, although rates have increase sharply in the UK during 2023, they are still below 5%.
Bad Debt:
A bad debt may be owed to a credit card or HP for a purchase of a car. Where the interest rate will be much higher, at present interest rates on credit cards are around 25%, so it makes sense to try and avoid this type of debt.
Or if you do have any such debts try and pay them off sooner rather than later as the quicker you pay off that debt the less interest they will charge you.
I would rather avoid any undue expensive required to cover such fees, charges and interest costs so that my money is working for me to improve my financial status.
Where can I learn to monitor or improve my credit score:
Some steps you make take, maybe to improve your credit score. By using companies such as Credit karma http://www.creditkarma.co.uk, Experian http://www.experian.co.uk/, it may allow you to get better lines of credit in the short term to save costs relating to current debts.
List any debts into 2 sections being “Priority” such as your mortgage, rent, any loans secured against your home, or to cover bills so gas/elec, council tax. Any missed payments for these types of items are considered serious and may lead to severe or long lasting consequences.
Other may be “non-priority” i.e credit cards, bank loans, store debts, payday loans, interest free credit. As long as you make the minimum level of payments, everything is fine. But you may consider paying them quicker if you want to improve your finances to get rid of any undue expenditure.
The idea of paying of debt can appear daunting, but you may break it down into bitesize chunks. Do you pay off the debts with the biggest rates of interest and costs, or do you pay off the smaller debts first to reduce the number of outstanding debts that you own.
So that you can see some kind of accomplishment by eliminating that debt or some light at the end of the debt tunnel. You can get off of debt if you take action and put a plan in place.
Another option may be to move debts to a new provider on a lower rate or interest only deal or doing some kind of debt consolidation.
If you need any advice on help with regard to managing serious debt, the following organisations will offer great and free advice to assist you.
http://www.citizensadvice.org.uk/
Take action to recover any lost accounts
As part of you plan, have you got any old, lost or missing accounts. Maybe because you have moved house, or ,lost paperwork and an institution have changed it’s name or consolidated by being taken by a new company.
It may be that you contact the financial organisation directly, or use an agency such as my lostaccount http://www.lostmyaccount.org.uk
Or what about any missing workplace or private pensions, using Pension Tracing Service, http://www.gov.uk/find-pension-contact-details though the government website. The service is free and impartial and may take a few weeks. Or call them on 0800 731 0193.
Through my day to day employment, I know numerous people that have managed to find their missing pensions. It’s a great feeling to sit in front of someone who may have been contacted by a recent pension provider for a pension that they may have set up in the 1980’s or 1990’s as part of their 1st job many years ago, when entering the workplace as they may have been contracted out via SERPS as a simple example.
So if you feel that you have any missing pensions, take the steps today to find those respective amounts.
Don’t waste time, take action now !
Hopefully by taking notes of the key points listed above and creating some kind of action plan, you can improve tour finances and give then a spring clean.
It may well be that you set around some time at the weekend when it’s quite. Or an evening not sitting in front of the TV. But it may prove to be a very rewarding and fruitful exercise, and it may also be financially beneficial to you.
Remember you only have to do it once, and moving forwards your finances will be much easier to manage. Then when you review on an annual basis it future it will be a very simple exercise.
If you found this post and information useful, or wish to look at other posts on improving your personal finances. Or the subject of pensions, check them out on www.moneyminted.co.uk
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