Five top tips to spring clean your finances
If you haven’t reviewed your finances for a while, here are five steps that could help you get into better financial shape.
What you’ll learn:Click to toggle accordion What you’ll learn:
How to tackle debt.
When it might be wise to consider investing for long-term returns.
How pension tax relief boosts your retirement savings.
Spring and the start of the new tax year is an ideal time to undertake a review of your finances to ensure you’re on track to meet your goals.
Here’s our step-by-step guide to spring-cleaning your finances for the year ahead. Bear in mind that tax rules can and do change, and their effect depends on your individual circumstances, which can also change. Also, investments can fall, as well as rise in value.
Step one: Check your paperwork
To see how you stand financially and how much you might be able to save it’s worth spending some time getting your financial paperwork together, including bank and savings statements – and any investments you might have.
You need to be clear on your financial position to work on how you can improve things, including keeping track of how much money you have coming in, and your outgoings such as your mortgage, and other regular bills.
A quick scan of your bank statements should give you some idea of how much, if any, spare cash you might have to save or invest each month, and whether any bills could be cut or reduced. You’ll probably find there are some luxuries you pay for, such as TV packages and gym memberships, that you don’t use and could be cut out or reduced.
Step two: Tackle debts
Make a list of any debts you have, including credit card and personal loan debts, and check the rate you’re paying on these.
Focus on paying off those with the highest interest rates first, as these are the most expensive and consider increasing your monthly repayments so you can clear what you owe more quickly. If you’re saddled with a lot of credit card debt, you could consider switching to a card offering 0% on balance transfers, to make payments without incurring further interest. However, check whether there are any fees involved and whether this makes financial sense for you.
Step three: Consider tax allowances
A new tax year means you are entitled to a range of fresh exemptions and reliefs available to you, and there are plenty of allowances to make use of in the 2018/19 tax year. Your annual ISA allowance remains at £20,000, and you may pay this into one or more of cash, investment or Innovative Finances ISAs, which invest in peer-to-peer lending. As part of your annual ISA allowance, you may pay up to £4,000 into a Lifetime ISA, to benefit from a Government bonus of £1 for every £4 saved, if you’re saving towards buying your first home or retirement. You won’t pay income tax, dividend tax or Capital Gains Tax (CGT) on any investments held within an ISA.
It’s worth noting, however, that if you invest outside an ISA, you won’t necessarily have to pay any tax, as long as your dividends don’t exceed the dividend allowance, or any interest from cash, funds, gilts or bonds aren’t higher than the personal savings allowance.
Outside an ISA, only profits made above the annual CGT allowance, which for the 2018-19 tax year is £11,700 (£11,300 in the 2017-18 tax year) will be subject to CGT at 10% or 20% depending on your tax band.
However, remember that tax rules can change in the future and their effects depend on your particular circumstances, which may also change over time.
Step four: Review your pension
Check on your retirement savings to see if they’re on track to provide sufficient income to support the kind of lifestyle you want when you stop work. If they aren’t, you may want to consider making additional contributions. You can receive tax relief on up to £40,000 of pension contributions each year, or 100% of your earnings, whichever is lower. This includes all contributions you make into any pension plans, such as a company pension scheme and payments that an employer, or anyone else, makes for your benefit.
However, if your adjusted earnings are greater than £150,000, you lose £1 of tax relief for every £2 you earn over £150,000, up to a maximum of £30,000. This means if you earn £210,000 or more, your annual allowance will drop to £10,000.
You can carry forward unused allowances from the previous three years, provided you belonged to a pension scheme during those years, your total contributions for the year do not exceed 100% of your income in this tax year, and your total pension savings do not exceed your Lifetime allowance.
Bear in mind that anyone who has drawn more than their tax-free lump sum from their pension will have the amount that they can contribute to a pension reduced to £4,000 or 100% of earnings, whichever is lower, as their annual allowance is replaced by the Money Purchase Annual Allowance.
If you’re paying into an employer’s pension scheme, there’s also the advantage of any employer contributions into your pot. However, remember that you can’t usually draw benefits from a pension until you are aged 55, rising to 57 by 2028.
Step five: Consider investing – but only if you’re comfortable with the risks
Provided you have some short-term cash savings available in case of emergencies, and you’ve dealt with unsecured debts, you may be considering investing with the aim of achieving potentially higher returns than you might get from cash. However, you’ll have to accept that you might get less, or you could lose money and get back less than you put in. Ideally, you want to invest for at least five years to give your money the chance to ride out the peaks and troughs of the stock market.
You can drip-feed money into the stock market from just £50 a month, if you’re nervous of investing a larger amount in one go. This may help to smooth out stock market volatility as you’re buying shares at various prices over time. If the market falls, your money buys more shares for a lower price, while if it rises, your money will buy fewer shares.
Remember that with any investment there’s the risk you could lose money, as your investment could fall as well as rise in value. If you’re unsure where to invest, you could take professional financial advice.
Remember, the value of investments can fall as well as rise and you could get back less than you invest. We're not recommending Ready-made Investments as being suitable for you based on your personal circumstances. If you're unsure about this investment’s suitability for you, you should seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.
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