It’s that time of the year again, when we draw a line under the successes and failures of the past year and shift our thoughts towards ideas of eating less, exercising more, and doing some volunteer work over the next 12 months. Another year, another list of New Year resolutions only half completed. With the FTSE 100 index approaching 6,000 points for the first time since the financial crisis fully took hold, here are my top five New Year resolutions for getting your finances in order and putting those finances to good use.
1. Make Sure You're Maxed Out
Have you taken full advantage of all the tax-sheltered options available to you—namely, by funding your company pension scheme and ISA up to the maximum allowable levels? For 2010, the maximum ISA contribution limit is set at £10,200, rising in line with the retail price index to £10,680 from April 6, 2011, half of which can be cash. In the autumn of 2011 the government will also be introducing so-called ‘Junior ISAs’, allowing you to save on your child’s behalf.
There are just three months left to top up your 2010 tax-free savings account so make sure you’ve done your research and selected your ISA-wrapped investments. You should find everything you need to invest in a tax-free ISA in this article.
Why not also increase your pension contribution to the maximum allowable level for the year ahead to maximise employer matching contributions? If you’re not signing up for the total amount your employer is willing to pay into your plan then you’re leaving free money on the table. Not to mention that taking full advantage—and control—of your pension plan is a good thing to get used to before the UK’s pension reforms kick in next year.
You can find plenty more information on pension planning and estimating how much you need to save for retirement here. Catch up on Morningstar Associates investment consultant Brook Sweeney’s asset allocation guidelines for investors in varying stages of life here.
2. Give Your Portfolio the Once Over
Overzealous trading can lead to excessive costs and overemotional investment decisions so we recommend checking up on your portfolio just once a quarter, or every six months. The purpose of this portfolio check-up is to systematically troubleshoot problem spots and identify changes you may want to make as part of your rebalancing programme. (You should plan to rebalance your portfolio--remove money from those investments that have performed well and plough it into your portfolio's underachievers--at least every few years.) This article lays out the five main areas you want to address, namely making sure your asset mix is in line with your targets, X-raying your portfolio, reviewing your individual holdings, examining performance, and then planning your next move.
3. Make Charitable Contributions
It’s been too long since I did any voluntary work yet it’s been on my list of resolutions each time. If this is something that you’re also interested in but it seems to always get pushed to the bottom of your To-Do list, one way to do something charitable that comes with an added bonus to you is to make charitable contributions. Though therefore not an entirely altruistic action (but then what is?), this can still enable you to tick that box without worrying that you never seem to have the time to spare.
Contributions, be it cash, securities, or land to qualified charities, are tax deductible, and not only does it reduce your tax bill but the tax you would have paid goes direct to your chosen charity. Anyone subject to Pay As You Earn (PAYE) tax can make charitable donations direct from their gross pay or pension, making it tax-effective giving. Best of all, by doing this around the end of the year you'll be aligning your spending with your values at a time when many charities are very much in need of funds. Alternatively, you can spread the cost by setting up monthly payments. The government's web site has plenty of information for individuals and companies on charitable giving.
4. Draw Up a Budget and Live Within Your Means
It sounds straightforward—and it is—but many people struggle through each month worrying whether the cash will run out before the next pay cheque arrives or if they have enough saved up to cover a household emergency such as a kaput boiler heater (Morningstar.co.uk Twitter followers will know all too well the financial problems that a kaput boiler can create in a British winter). Calculating your total incomings and outgoings can go a long way to reducing these concerns as it will leave you with an ongoing idea of where you stand financially.
There are plenty of online budget planners that can be downloaded, such as this one, but the general rules are simple: tot up your total annual income and your total annual expenditure, divide by 12 to get a monthly average and then do some rejigging to ensure you have a fair representation of monthly finances. For example, you may know that you’re going to receive a company bonus in January or that you plan to visit family in Australia in July. Jot down these incomings and outgoings in their allotted month and you can then choose how much you need to save each month to afford your holiday or how much of your bonus will go towards some household DIY.
Organising regular payments, such as Direct Debit utility bills, to leave your account a day or two after your pay cheque has cleared is a good way of ensuring you don’t get caught short at the end of the month when a bill you’d forgotten about suddenly appears on the doormat. Similarly, setting up a Standing Order to transfer a portion of your monthly pay cheque directly into a savings account, ISA or other investment vehicle each month is another good way of ensuring you’re regularly putting money away without necessarily feeling the pinch. Plus, this way you’ll also benefit from compound interest and pound-cost averaging.
5. Cut Costs Rather Than Cutting Back
Many people’s knee-jerk reaction when they’re struggling financially is to cut out life’s little luxuries and reduce spending on anything that isn’t completely essential. Though certainly not a bad rule of thumb, you may be surprised at how much you can actually save just by doing a bit of window shopping and rather than changing your lifestyle you can simply change how much your lifestyle costs. Using comparison web sites to find which utility providers offer the best rates and sign-up deals is one example, while ensuring you pay off your credit card debt in full each month will also save you valuable pennies…and, therefore, pounds.
A version of this article was originally published in December 2009.
