The experts’ guide to sorting out your personal finances in 2021
Becky O’Connor, head of pensions and savings for Interactive Investor…
Keep up savings level: If you’ve been saving more than usual in 2020 – try to keep up the same level in 2021. We’ve learned the hard way that we can do without when necessary, so if you’ve increased your pension or savings contributions this year, why not just leave them at that higher level?
Create jars for different savings goals: There are lots of reasons to save – holidays, Christmas, birthdays… but there are also longer-term goals such as costly home renovations or children’s university fees, for instance.
Open different accounts or ‘spaces’ with different labels. Set a target amount for each and divide that by 12 to work out what you need to save into each, every month, to reach your target by this time next year.
Time to consider the stock market: If you’re saving more, be mindful you don’t keep more cash than you need in savings accounts. Rates are low and inflation is set to rise. You need a good cushion but not more than three to six months of salary. If you’ve saved more than that – amazing! But that means it’s time to look for other homes for your money, like the stock market.
Put your future self first: Consider increasing your pension contributions by just 1% this year. For someone on an average salary, paying in just 1% more a year from age 21 to 68 can add £24,000 to the eventual pension pot.
‘Low spend months’: Designate at least three months of the year as ‘low spend’ months. These can be months when there are no expensive family birthdays, no holiday plans, no exceptional childcare costs. Make these the months you can make the biggest gains if you find it a hard slog saving extra every single month.
Sarah Pennells, head of financial capability at Royal London…
Clear debts, if you can: Many of us have debts, whether that’s a mortgage, a loan, car finance or money we owe on credit cards. A mortgage is a long-term loan, which most people don’t pay off until later life. But if you have debts that charge a high interest rate, (such as a credit card or a store card) the costs of interest can really add up. There’s a useful calculator at https://www.cardcosts.org.uk/ that shows you how quickly you can pay off your credit or store card balance if you can afford to increase your payments. If you are really struggling with debts or household bills, talk to a debt advice charity, such as National Debtline or Stepchange.
Find out where your money goes: If you’ve been working from home in 2020, you may have been surprised by how much less you’ve spent. If money normally slips through your fingers, keep a spending diary (via an app, using a note facility on your mobile or a spreadsheet). Noting down what you spend for a month sounds a bit dull, but it’s such an effective way of showing you where you overspend.
Learn to love the savings habit: If 2020 has shown us anything, it’s that life can take an unwelcome turn when you least expect it. Having some savings behind you can mean the difference between being able to afford an unexpected bill or something like a car repair, and facing the prospect of going without or having to borrow.
Impose your own ‘cooling-off period’: Online retailers are experts at making it incredibly easy to spend money. One-click ordering and ‘buy now, pay later’ mean you may not feel like you’re spending money at all. If you’re an impulse buyer, you may find it helpful to give yourself 48 hours to think about whether you really want that purchase, or whether you can do without it after all. Another trick that someone told me, is to calculate how long you’d have to work in order to afford what you’re about to buy. It can be quite a sobering experience!
Check your credit report: Your credit file is used by a range of companies to help them decide whether or not to let you have credit, whether that’s a bank loan or a pay monthly mobile phone contract. With credit cards and loans, your credit file can sometimes be used to help the company work out how much interest to charge you.
Many people don’t check their credit report (which is a snapshot of your credit file), but it’s free and straightforward to do, and it also means that you can correct any mistakes you spot. The main credit reference agencies, which compile credit files on us, are Experian, Equifax and TransUnion.
Sarah Coles, personal finance analyst at Hargreaves Lansdown…
Face your festive debts: One in four of us put at least some of the cost of Christmas on a credit card, while one in 20 dip into their overdraft, and one in five take four months or longer to pay back their festive debts. January is a good time to get back on top of short-term borrowing. Take a close look at your spending and see where you can cut back each month to free up a decent sum of cash. Then set up a direct debit at the start of each month to use that cash to pay your debts down.
Come clean about debts: Our research shows more than one in four people have debts they’re hiding from their partner. This rises to 44% among those aged 35-54. If you’re carrying the burden of this debt alone, not only are you unable to work towards paying it back together, but there’s also a risk you’re making their financial position worse too. It’s incredibly difficult to raise the issue of debt, especially when it has got out of control. However, the sooner you do, the sooner you can stop the problem building and start finding a solution.
Keep an eye on your spending: Drawing up a budget can transform your finances, but before you start, you need to know exactly what you’re spending – and on what – and for most people this is a mystery. A flick through your statements can highlight regular expenses and bills, but it can be hard to see the everyday spending. The old school approach is to take a notebook with you for a month, and jot down everything you buy. Before you go to those lengths, take a closer look at your banking app, because some banks will break down your spending for you, so you can see exactly where you’re being led astray.
Start regular savings: The general rule of thumb is that we should all have three to six months’ worth of essential expenses as an emergency savings safety net. This is such a mountain to climb for many people that it’s easy to give up. However, the key is to start small and see how you go. If you can free up £10 to save in January, try bumping it up to £20 in February, and if you don’t run out of cash, you can increase it to £30 in March and so on. If you can gradually build up to £50 a month, you’ll have £500 by the end of the year, which is a fantastic start.
Ask your parents about power of attorney: According to our research, only around one in ten people say their parents have drawn up a lasting power of attorney. As we get older, these are vital. You can get financial versions and healthcare ones, and ideally you should have both. They ensure that if you are unable to make decisions for yourself as you get older, someone you trust can make those decisions for you. It’s not an easy topic to raise with family, but it’s the only way to protect them.