Our lives changed in ways we could not have imagined in 2020 with restrictions on movement that forced many of us to press pause on so much that we took for granted.
Spending levels fell during the initial lockdown creating what is referred to as ‘forced saving’. This meant a lot more cash sitting in bank accounts which also represents an opportunity to make that money work harder for you. So here are a few top tips:
Clear or reduce your debts
This is the first port of call if you have unsecured debts such as loans, credit cards or overdrafts. Start with the most expensive (highest interest rate) first.
Increase your rainy day fund
The logic for building an emergency fund when you need cash at short notice should be even more important today. The rule of thumb is to have between 3-6 months’ worth of expenditure as your emergency fund. This may sound ambitious but any money you can build to access in the event of an emergency will strengthen your financial resilience.
Reduce your mortgage term
With cash savings rates so low, increasing your mortgage repayments is a particularly effective way to put any surplus income to work. Overpayments on your mortgage can help you to clear it more quickly, saving potentially thousands of pounds in interest long term and making it easier to remortgage. Most lenders allow you to pay 10% of your mortgage balance as an overpayment each year but check with your lender as there can be penalties for overpaying by too much.
Build a long-term foundation
If you’ve cut your spending and cleared your debts and have a rainy day fund set up, you might want to make your spare cash work even harder by investing it. Individual Savings Accounts (ISAs) are the place to start. You can invest up to £20,000 a year and all future growth within the ISA is free from any liability to Income or Capital Gains Tax. This means when you do decide to draw an income from this fund, it will be free of capital gains tax and income tax. If invested in a stocks and shares ISA, the funds have the potential to benefit from greater growth over the years due to the effects of compounding, and historically stock market investments have generally outpaced inflation over the long-term.
Give your pension a shot in the arm
Starting or increasing your pension payments is another tax-efficient way of strengthening your long-term finances. Government tax relief is paid on contributions up to certain limits, while if you’re paying into a workplace pension, your employer may also top it up too through matching employer contributions.
Whether you are buying your first home or downsizing, starting a family or retiring, speaking with a financial adviser can offer help with organising and planning for a better future.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
An investment in equities will not provide the security of capital associated with a deposit account with a bank or building society.
The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances.