1. Decide on Some Long Term Goals
Where would you like to be in the future? Most people don’t have long term goals, so deciding what you really want out of life will already place you ahead of most of the population.
Retirement is the obvious place to start. Don’t just think about how much money you will need – think about what you would like your life to be like. How will you spend your time? Where will you go on holidays and day trips? Would you prefer a simple life in the countryside or to travel the world? Are there any new hobbies you would like to take up?
How much will your ideal lifestyle cost? While you will probably spend more on holidays and hobbies, some other costs will go down as debts are cleared, children leave home and you no longer have the costs of working. Remember to factor in the State Pension.
Perhaps you have other goals. For example, a dream house or the holiday of a lifetime. These can be built into your plan.
2. Make a Budget
January is the ideal time to make a budget as you have a full calendar year to work with.
Start with your income. How much money do you have coming into your bank account every month? As well as salaries, you may have self-employed income, rental, dividends, Child Benefit or pensions in payment. Work out the net total. Remember to account for tax if this isn’t automatically deducted.
How much are you spending? Start with your basic bills and add in essential monthly costs such as food, petrol and transport. Other costs might not be regular, for example clothing or gifts – make an annual estimate and divide by 12 to reach the monthly figure.
Does your income exceed your expenditure? You can start thinking about where to allocate the extra money. Set some aside in a savings account or increase your pension contributions. Don’t simply let the money accumulate in your current account or you will probably spend it without realising.
Are you spending more that you earn? You need to address this, either by cutting back or earning more money. Maybe you can ask for a pay-rise, or go for a promotion. Start a side business in your spare time.
If your budget is evenly balanced, you may be fine in the short term, but if you are not saving anything for the future you should look at building this into your plan. Review your bills to see if you can free up more money by switching to a better deal. If you divert the saved money into a pension, you won’t even notice a difference in your monthly budget, but could improve your retirement.
3. Address the Risks
The most immediate risk is that something could go wrong and you need to access several hundred (or thousand) pounds at short notice. It could be a major repair, a family emergency, a redundancy, or any number of other unpredictable events.
How would it impact your financial security if something like this happened, and you had to rely on a credit card or overdraft? You may be repaying it for several months, with added interest. It would be far less painful to save every month and build up a fund to cover any emergencies.
It is also a good time to review your life cover, critical illness and income protection cover. Does your employer offer any of these plans within your package? Is your current cover enough for your needs? Have your circumstances changed since you last reviewed your insurance?
If you are in relatively good health, starting or increasing an insurance plan is usually fairly cheap, especially when you consider the consequences of not being insured when the worst happens.
4. Clear Expensive Debt
Debt can be useful, and repaying it is not always a high priority. For example most mortgages are still at a fairly low rate, historically. Diverting money from your pension fund to clear your mortgage would not make financial sense in most cases.
Credit cards should either be cleared as soon as possible or transferred to a 0% promotional deal.
Loans can either be cleared or maintained depending on the rate, your budget and other priorities. In most cases you should not use your emergency fund to clear loans or 0% interest credit cards. If a genuine emergency arises, you will no longer have the cash available and may need to acquire more debt. This can end up being more expensive than the initial loan.
With your budget in hand and your emergency fund in place, the need for taking on more debt in the future is reduced.
5. Save for the Future
Now that your immediate situation is more secure, you can start to think about working towards those goals you set for yourself.
A pension is the most logical option for saving towards retirement, but remember that you cannot access the funds before age 55. The minimum retirement age is set to increase to 58 one day. So, if early retirement is one of your goals, a Stocks and Shares ISA is the ideal way to build up a more easily accessible fund.
An ISA also works well if you have pre-retirement goals, although a Cash ISA (or high interest savings account if you are already using your ISA allowance) may be more suitable if you need the money within 5 years.
New Year brings a new start, so why not commit to getting your finances in order in 2022?
Please do not hesitate to contact a member of the team if you would like to find out more about financial planning.