Five New Year’s resolutions to change your (financial) life
- Treat yourself to a makeover
- Clear the clutter
- Cut it into smaller portions
- Get moving
- Build good habits
At this time of year, new leaves are being turned over across the country. But while you may be tempted to join the rush for gym memberships and shiny new spiralizers, you may find a financial resolution far more rewarding.
Sarah Coles, Personal Finance Analyst, Hargreaves Lansdown reveals five easy financial resolutions, that will still be transforming your financial life long after you’ve forgotten what the gym looks like and the spiralizer hits the charity shop.
1. Treat yourself to a (financial) makeover
Make a virtue of the fact that January is often too cold or too cash-strapped for social life: stay in and take stock of your financial life.
Consider your overall pension and investments position. Review how much you’re paying in, whether that’s enough to meet your goals, and how to free up more cash to invest. Take a look at performance too, so there are no nasty surprises waiting when you finally come to cash in your investments. You also need to consider whether the mix is still appropriate if your circumstances have changed.
2. Clear the (financial) clutter
You’re far more likely to stay on top of your finances if you make life easy for yourself. If you have built up several pensions, a number of ISAs, and a handful of individual shares over the years, the risk is that you’ll either have a complex filing system that dominates the spare room, or little idea about what you have – or where it is.
Dig out the paperwork on your old pensions, check whether there are any valuable guarantees or expensive penalties for switching, and if you’re free to switch, consider moving them into a single, more modern pension, which is likely to be cheaper and have more investment options.
As for your investments, stocks and shares ISAs and shares, it’s easiest to get an overview if you hold everything on a platform and can see it all in one place – including on your smartphone. It also makes life easier when you want to trade or switch.
3. Cut it into smaller portions (and then build a savings portfolio with it)
A third of money in instant access accounts hasn’t been touched for five years*, and given that the average easy access savings account rate is 0.4%**, there’s a good chance your savings could be working a great deal harder. The answer is to turn your cash savings into a portfolio.
You need 3-6 months’ worth of expenses in easy access accounts as an emergency fund. Once you have that in place, for periods of between one and five years, it’s worth looking at fixed rate bonds, which tend to offer higher rates in return for tying your money up. In the current market you can get more than 2.5% over five years. Be aware, however, that the longer you fix for, the higher the risk that interest rates rise in the interim, leaving your account looking uncompetitive.
Finally, if you are saving for a goal further than five years in the future, it raises the issue of whether this portion of your portfolio should be in cash savings at all. There are plenty of times when it is appropriate, but consider whether your time horizon and appetite for risk means some of this could be moved into share-based investments. Your capital will be at risk, but this has more opportunity for growth than cash when you are investing for 5-10 years or more.
4. Get moving (with your ISA)
The ISA rules now let you switch between cash ISAs, stocks and shares ISAs, and innovative finance ISAs, and plenty of people have been taking advantage. With the decline of interest rates on cash ISAs, our figures show that the number of switches from cash ISAs to stocks and shares in the first ten months of 2017 were up 53% on the same period a year earlier. Consider whether your ISA choices suit you, and whether it’s time to switch.
It’s also well worth considering transferring if you have a Help to Buy ISA. If you are aged 18-40, and it’s a year or more until you plan to buy a property, then the Lifetime ISA may well prove a better alternative. Both offer an additional 25% bonus on your contributions from the government – so for every £1,000 you put in, you get another £250 top up. However, the LISA has additional advantages: you can save more, get a bigger bonus more quickly, pay money in more flexibly, invest in a wider variety of assets, and buy a more expensive property outside London. If you switch before April 2018, then everything you built up in your Help to Buy ISA prior to April 2017 can be switched without eating into your LISA allowance (the rest will come out of this year’s £4,000 LISA allowance).
5. Build good (regular investment) habits
Make this the year that instead of putting off investments, or rushing to meet the ISA deadline, you commit to investing little and often. This is less painful than trying to find a lump sum, and it also enables you to benefit from something known as pound cost averaging. This means that you average out the price you buy investments at – so you can buy more units when the price falls, and benefit from bigger returns when it rises. So, for example, in the table below, you’d pay an average of £3.53 and get 85 shares. Compare that to investing the full lump sum in month one, when you would have paid an average of £5, and got 60 shares.
|Month||Monthly investment||Share price||Number of shares bought|