Five ways to take control of your finances in 2017
Sorting out our finances is often top of the list when it comes to New Year’s resolutions. There are plenty of simple ways to take control of your money this year, from making the most of new allowances to topping up your pension.
It can be tempting to stick our heads in the sand when it comes to sorting out our finances, but the New Year offers a great opportunity to get them in the best possible shape.
Whether you simply want to make more of your money or have debts to service, there are simple ways to manage your finances in the year ahead.
If you have debts, work out exactly how much you owe and to which provider. Tackle your most expensive debts first, which means the ones which charge the highest interest rates. If you’ve credit card debts, these are often the most expensive, so consider increasing your repayments to clear your balance sooner.
Alternatively, you could consider moving credit card debt to a card offering 0% on balance transfers for specific period. This will enable you to repay gradually over the given timeframe without racking up further interest.
Your mortgage is also worth considering, as you can usually overpay on standard mortgages by up to 10% a year without penalty. With paltry savings rates, putting cash towards paying off your home loan may be worthwhile. However, that’s only if you don’t have other more pressing debts to service first.
Building a reserve fund
Squirrelling away a minimum of around three months’ worth of salary is generally considered wise advice, for use as an ‘emergency fund’.
If you have yet to build up any rainy day savings, consider where spare cash might be found. A quick scan of your bank statements may reveal where you can cut costs. For example, utility bills can often be reduced by switching to cheaper providers.
While interest rates may not prove enticing at present, it’s still worth holding a sum in cash that’s easily accessible – you never know when you might need it.
You can typically get higher rates for locking cash away for specific periods in fixed-rate accounts, but for an emergency fund, this isn’t preferable.
Remember you only pay tax on savings if you’re a basic-rate taxpayer earning more than £1,000 interest a year, and higher-rate taxpayers earning more than £500, following the introduction of the personal savings allowance (PSA) in April 2016.1
Diversifying your investment portfolio
There are methods of reducing your risk as an investor amid an uncertain economic climate. You can pick from a range of managed funds, spreading risk among a large pool of companies, instead of simply opting for individual shares, for example – which carry a higher degree of risk.
You have an array of asset classes to choose from, including equities, bonds, and cash, to build a balanced portfolio. Before deciding on the right mix for you, be clear on your goals, and how much risk you’re willing to take with your money.
You can further diversify your portfolio by spreading your investments over several geographical areas. If you invest in companies from different countries then even if, say, manufacturing is performing poorly in the UK, it might be flourishing in the Far East.
Please remember that, no matter how much you diversify , investments can fall as well as rise and you may get back less than you invested.
Making use of tax allowances
There will be plenty of new allowances to take advantage of in 2017.
Married couples and those in civil partnerships will from April start to benefit from an additional family home allowance, which will make it easier to pass on the family home to direct descendants without incurring Inheritance Tax (IHT) charges . This tax is typically payable on property, money and possessions above the £325,000 threshold.
The new allowance will be phased in gradually from the 2017/18 tax year, until the total IHT threshold reaches £500,000 per person in 2020-2021.2
Tax rules can be complex, they can change in future and their effects on you will depend on your individual circumstances. So, it’s a good idea to get professional financial advice to help you work out the best ways you might be able to reduce your liability.
The Lifetime ISA is another new introduction in April, offering a tax-free boost of up to £1,000 a year towards buying your first home or saving towards retirement. Savers up to age 40 can open these accounts and squirrel away a maximum of £4,000 each year, with the government boosting returns by 25p for every £1 saved.3
The personal allowance, the amount you can earn without paying tax, will increase from £11,000 to £11,500 a year.4
There are also two new tax-free £1,000 allowances for what is known as ‘the sharing economy’.5
One is for providing services or selling goods. For example, people sharing power tools, offering lift shares or selling goods they have made will no longer pay tax on income up to £1,000 made from these occasional jobs.
Similarly, the first £1,000 of income from property made by, say, renting loft storage or a driveway, will be tax free.
Topping up your pension
Consider boosting your retirement income. If you’re employed, check the details of your company pension scheme.
Minimum contributions can be small, amounting to as little as 2% of income – if you can afford a greater sum, it could be worth raising the amount you pay in. Many employers offer to match contributions, up to a certain cap.
The years before you retire are vital for making the most of any investment growth potential while you are at the peak of your earning power. Remember the more income tax you pay, the greater the tax relief on pension contributions.
If you are self-employed, and comfortable managing your own investments, you may want to consider opening a self-invested personal pension (SIPP). Payments into a SIPP benefit from the same tax advantages as other pensions, so your payment is topped up by the government, up to your personal allowance. One of the main advantages of using a SIPP is that they usually offer access to a much wider choice of investments than other types of pension.
Please remember that investments can fall as well as rise and you may get back less than you invested. Past performance is not a reliable indicator of future performance.
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