10 tips to build wealth in the New Year
Financial resolutions often top the list of things people would like to change or improve in the New Year.
What you'll learn:Click to toggle accordion What you'll learn:
How pension tax relief boosts your retirement savings.
Why investment goals are important.
Why it’s important to diversify your investments.
The New Year is a good time to focus on ways you might be able to boost returns from your savings and investments and try to make your money work harder for you. Here are 10 simple ways that could potentially help you build wealth in the year ahead.
1. Pay down debts
If you’ve got any outstanding debts – perhaps you’ve piled a few pounds onto your credit card over the festive season – try to pay these off as soon as possible in the New Year. As a starting point, work out what you owe and check the rate you’re paying. Tackle the debts with the highest interest rates first, as these are the most expensive debts. One way to reduce credit card debts is to increase your monthly repayments to clear the balance at a faster pace, or switch to a card offering 0% on balance transfers.
2. Track spending
It may be worth monitoring your spending for a month or two to see exactly where your money goes, and whether you can free up any spare cash to save or invest. You might find that you have more than you thought to spare each month, if you cut out some luxuries and trim your spending – for example, by cutting out takeaway coffees, or by cancelling an unused gym membership. There are plenty of phone apps and online tools that can help you to track your spending, and budget effectively.
3. Use tax allowances
There are plenty of allowances to make use of in 2018. Whatever you choose to invest in, remember to consider whether to use your annual ISA allowance by the end of the current 2017-18 tax year, which finishes on April 5. This year’s allowance is £20,000, and if you don’t use it by the end of the tax year, it’ll be gone for good. You’ll get a new £20,000 allowance in the 2018-19 tax year, which begins on April 6. You may pay your ISA allowance into one or more of cash, investment or Innovative Finance ISAs, which invest in peer-to-peer lending, or you can put up to £4,000 into a Lifetime ISA. You won’t pay income tax, dividend tax or Capital Gains Tax (CGT) on any investments you hold in an ISA.
You might not pay tax on interest and dividends anyway, as since April 2016, investors have a tax-free dividend allowance outside an ISA of £5,000 a year (due to drop to £2,000 from April 2018). However, if your dividend income is above this amount, investing in an ISA could give you the benefit of additional tax-free payments. There is also the Personal Savings Allowance, which enables basic-rate taxpayers to earn up to £1,000 interest a year tax-free, or £500 for higher-rate taxpayers. Additional rate taxpayers aren’t entitled to this allowance, so ISAs may remain worthwhile for those who don’t qualify, or who have a large amount of savings and have used up the PSA.
The personal allowance, which is the amount you can earn without paying tax, will increase from £11,000 to £11,850 a year in April 2018.1
However, remember that tax rules can change in the future and their effects depend on your particular circumstances, which can also alter over time.
4. Get a regular investment habit
You don’t need a large sum to start investing, and making regular monthly contributions can be an effective way to build long-term wealth. Remember, however, that investment should only generally be considered once short-term or unsecured debt has been repaid first. You can start saving into the market with just £50 a month, drip-feeding over time, which may be particularly beneficial over the year ahead, if you’re nervous of potential economic and political uncertainty.
Drip-feeding your money gradually into the market may help smooth out volatility as you invest across a range of prices. If the market falls, your money buys more shares at a cheaper price. Conversely, if the market rises, you will find your money buys fewer shares. Bear in mind that you could still lose money, as your investments could fall as well as rise in value.
5. Top up your pension
You could increase your potential wealth in retirement by paying more into your pension. This way you can take advantage of any employer contributions, if you’re paying into a work place pension, and there’s also government tax relief. Bear in mind that you can’t ordinarily draw benefits from a pension arrangement until you are aged at least 55 (rising to 57 by 2028), so this could be a long-term investment.
Provided that you respect the pension allowances, and don’t contribute more than 100% of your income you receive tax relief at the basic rate of 20% on contributions made to workplace and personal pensions, so for every £80 you pay in, the taxman tops this up to £100.
The higher the rate of income tax you pay, the greater the tax relief on pension contributions. If you’re a higher rate or additional taxpayer, you are able to claim up to an additional 20% or 25% on top of the basic rate through your self-assessment tax return.2
However, remember that tax rules may be altered in the future, and their effect depends on your personal situation, which can also change. Any investments that you make within your pension arrangements can fall in value, just like any others.
6. Focus on your investment goals
Consider any short, medium or long-term goals you might have for investing. For example, you may be saving towards retirement, and often it takes decades to build up enough funds to provide sufficient pension savings to provide the income you need. Focusing on the reasons why you are investing may help you stick to your strategy, and gradually build wealth over the years.
7. Stay invested
Ideally, you should invest for a minimum period of five years to ensure that your investment has time to ride out the highs and lows of the stock market, potentially smoothing returns over the long-term.
No-one can know exactly when share prices might rise or fall, but staying invested can help avoid the risk of missing any of the best days because you’ve sold at the wrong time. However, of course, there are no guarantees that you won’t still lose money in the end.
8. Broaden your investments
As a general wealth-building rule, it’s a good idea to hold a spread of assets. These may include shares, bonds, property and cash, to build a balanced, diversified portfolio – and even out returns over the long-term.
If the market suffers a setback, broadening your investment mix may provide some protection, as different assets may perform in different ways depending on market conditions at the time. You can further diversify your portfolio by spreading your investments across several geographical areas.
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.
9. Manage your emotions
Letting your emotions direct your investment decisions isn’t generally considered a sensible path to boosting returns. Whilst it’s both normal and understandable to experience some stock market jitters as an investor, it’s important not to panic and sell out of the market, at a loss. Think about the reasons why you chose your investments in the first place, and remind yourself of these if you’re feeling nervous.
10. Reinvest dividends
Many investors receive an income through dividends, which may be attractive given low interest rates and rising living costs. However, findings from The Barclays Equity Gilt Study 2017 show the value of reinvesting dividends over time, to buy more shares. It found that if you had invested in UK equities at the end of 1945 and reinvested all dividends as they were received, after adjusting for inflation, you would have built up a sum worth over 20 times that which you would have had if you hadn’t reinvested the dividends.3
Whilst few investors are likely to invest over such a long period, this example illustrates the point that reinvesting income can potentially substantially boost your overall returns. That’s because your returns are also earning returns, which is known as compounding. However, bear in mind that even if dividends are reinvested if the share price falls, your investments could be worth less than you put in.
Please remember too that past performance should not be seen as a guide to the future, and dividends are not guaranteed.
Remember, the value of investments can fall as well as rise and you could get back less than you invest. Seek independent advice if you’re unsure of this investment’s suitability for you.
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