As we begin the new tax year, working out what your money is doing for you now and where it might come from in the future can help give you real peace of mind, particularly in these uncertain times. But sometimes it’s knowing where to begin that’s the hardest part.
The team at George Square Financial Management shares a 10 step guide to help you build a better financial future.
Tracking your expenses
The first step to helping you build a better financial future is knowing where your money is going. Monitoring your expenses can keep your spending on a parallel track with your income and help you avoid overspending.
This goes hand in hand with setting up a budget; you may have a good handle on your monthly outgoings, but what about your daily expenses? It’s important to review all of your expenses for ways to cut back – then you can decide what to do with the extra money. Set yourself specific goals. This could be building an emergency savings fund, paying off credit card bills or increasing retirement savings.
Next, make a list of all the borrowing you have; this should include your mortgage, personal loans, store cards, credit cards and bank overdrafts. You can then calculate the total amount you owe and continually update this over time to track your progress. If you cannot reduce your overall borrowing, you should ensure you are paying as low an interest rate as possible. This might mean switching credit cards or mortgages, or consolidating various borrowings into one loan. Find out more about the benefits of debt consolidation here.
Tax really matters
There are plenty of tax allowances to make use of each financial year – remember this runs from 6 April to 5 April the following year – so it’s worth being aware of which annual allowances you can benefit from.
One of the most popular ways to save tax is by fully utilising your annual Individual Savings Account (ISA) allowance, which is £20,000. You may save or invest your ISA allowance into one or more different ISAs, or you can put up to £4,000 into a Lifetime ISA (you must be aged 18 or over but under age 40 to open a Lifetime ISA). You won’t pay income tax, dividend tax or capital gains tax on the proceeds of any investments you hold within an ISA.
Good investing habits
Investing money regularly, instead of as a one-off lump sum, can reduce the impact of a market downturn on your portfolio. If you are looking for a smoother ride during volatile markets, pound-cost averaging – where money is drip-fed into the market over time – could possibly be an appropriate option. Steady, regular investments can provide you with some protection in case of sudden market corrections.
Pension savings boost
It’s important to think about how much money you might need in the future and whether you’ll have enough to give you the lifestyle you want. Making the right choices now could make a big difference to how much money you have in the future; saving into a pension plan could help you achieve the lifestyle you would like.
One of the great things about saving into some pension types is the tax relief you can receive. If you’re a basic rate tax payer, for every £100 saved into your pension the cost to you is only £80. This could be even less if you’re a higher or additional rate tax payer. Tax rules may be altered in the future, and their effect depends on your personal situation, which can also change.
It’s worth keeping in mind that you can’t ordinarily draw benefits from a pension arrangement until you are aged at least 55 (rising to 57 by 2028), so this is a long-term investment.
Focus your goals
Refocusing your finances and recommitting to financial goals can seem challenging, especially as we start to recover from the coronavirus pandemic and lockdown restrictions, but it’s not a lost cause.
To help build a better financial future, you should focus on making several small, short, achievable financial goals. By setting smaller goals and achieving them one at a time, you’re more likely to stay motivated and reach them. Making decisions with a clear endpoint in mind can make it easier to achieve financial security and indepedence.
Stick to your investment plan
As governments around the world take further action to stem the spread of coronavirus, stock markets continue to react with increased volatility. During any period of volatility, thinking about your reasons for investing and what you ultimately plan to do with your money is important.
Selling out in fear can potentially be the worst thing to do. Large falls can often be followed by large rises, leading to the risk of losing on both sides. It can be wise to avoid the daily monitoring of investments during falling markets; this can result in an over-emotional reaction and lead to making irrational decisions.
Diversify your portfolio
When it comes to investing, you need to take on some risk in order to generate a return. One of the best ways to control that risk is through ‘diversification’. This means spreading your capital amongst different investments so that you’re not reliant upon a single investment for all of your returns.
The key benefit of diversification is that it helps to minimise risk of capital loss to your investment portfolio. Read our recent guide on how investment diversification can help you hit your financial goals here.
Dividends are payments of some of the profits made by a company to its shareholders. They are not guaranteed and are at the discretion of the company. But when they are paid, you have the option to reinvest them into more of that company’s shares.
Reinvesting dividends can add significant wealth over normal investment returns; it is one of the most powerful tools available for boosting returns over time. Those seemingly small amounts reinvested can grow into much larger amounts when used to buy even more shares of stock that can pay further dividends in turn.
Always discuss your concerns
When faced with certain choices and in the midst of volatile periods, some people may understandably make hasty decisions that are not in their best long-term financial interest. But it’s natural to feel worried.
Having a professional financial adviser, who can advise you before making any decisions, is key. This will enable you to discuss your concerns to help keep those market emotions in check and work together to ensure your long-term investment strategy remains on track. At George Square, we like to follow a carefully designed financial planning process so that you know exactly what is happening at each stage. Find out more about how we work here.
Whatever your plans, expert professional financial advice can help bring them to life.