7 New Year’s resolutions to get your finances in shape
With a new year comes new intentions. Michael Martin, Private Client Manager, says that there is no better time to start talking about money than in the new year, following what can be an expensive festive period for families, with seven resolutions to get your finances in shape:
- Don’t be kept in the dark
Whilst it’s natural for most of us to divide up household chores, when it comes to managing household finances, there’s often one person in the driving seat. It’s understandable that the person with the greatest interest might want to take the lead on savings and investments. But it is important to know where everything is kept, from share certificates through to property deeds and other investments, in case anything should happen such as illness, bereavement or divorce. Being in the dark can cause a huge amount of additional stress at vulnerable times.
- Keep aside some money for a rainy day
Many people in the UK don’t have anything to fall back on in a financial emergency and therefore ensuring you have at least three months’ worth of living expenses will allow you to sleep better at night, should something unexpected happen. In an ideal world, six months’ worth of living costs is even better.
If you do not have any money set aside for this specific purpose, then this should take priority over other financial goals. Once this has been achieved, you can therefore take a much longer-term view with your other investments, safe in the knowledge that you have something to fall back on if you have a sudden change of circumstances. This can also help you avoid other financial issues, like having to take on additional short-term debt and other negative consequences of being caught out.
- Diversify your tax risk
Political uncertainty and a fluid tax system means that diversifying your tax risk is a good way to ensure that you won’t be caught out by any changes that may happen.
While it’s impossible to be completely ‘future proofed’ you can try to be as robust as possible by making sure that you use all your allowances. That way, should one investment become tax inefficient, the others can compensate. Use pensions, your Capital Gains Allowance, ISA and dividend allowance. Other higher risk investment vehicles could also be Enterprise Investment Schemes and Venture Capital Trusts.
The government does not give us many ways to save tax, so make sure you use as many as you can – you never know when they may be taken away!
- Plan for your children’s future
Most kids rightly get spoiled rotten over Christmas, but just as many recently purchased drones might have already been lost on their maiden voyage, parents don’t want their hard earned savings going the same way.
If you don’t want to spoil your children, or crush their ambition by giving them too much, it’s worth thinking about saving into a pension for them. With burdens such as university fees, not to mention postgraduate study, saving for a deposit on a house, and childcare fees further down the line, many are not getting started with a pension until much later in life. Saving into a pension for your children could turn out to be one of the best things you ever do for them.
- Nothing personal? Try to remove behavioural bias from your portfolio
Something we notice with potential new clients is how personal their investments can be. Clients may have previously had a good experience with a certain stock or sector and this can lead to a behavioural bias in their investment decisions. We see clients holding on to ‘losers’ in the hope they recover some of their former sheen, or having an overweight position in a sector familiar to them, exposing their wealth to unnecessary risks.
It makes sense to invest in investment stocks or sectors that you have a personal interest in, but it is not necessarily the best way to construct a diversified portfolio. There’s nothing wrong with having some fun with shares, but it is not the right way to weather proof your portfolio too. It is important to diversify geographically, but also at a sector level too. Multi asset funds can help diversify risk further beyond traditional asset classes.
- Take advice for the big moments
Whether it’s covering education costs or taking that first step onto the eye-wateringly expensive housing ladder, speaking to a professional can help you prepare for those big moments that matter.
Of course, deciding when and if to take financial advice can be difficult. But there are some key moments in life when doing so really makes sense; such as getting married or entering a civil partnership, receiving a windfall of money such as inheritance, or when it comes to your retirement.
Throughout all these moments a professional financial planner is well equipped to analyse your situation, help plan your approach, and advise what’s best for you and your family.
- Stay flexible
While having a clear financial plan in place is the best way to arm yourself to secure a robust financial future, it’s also important that those financial plans are flexible and that you don’t leave yourself dependent on one outcome.
Diversifying your risk, be that tax or investment, and having a mix of both short and long-term savings should allow you to weather any storms and keep your longer-term financial plans on track. Having the proper advice to implement this flexibility to cover unforeseen costs or market downturns can allow you to protect your finances and achieve the lifestyle you want.
Tax rules are subject to change and taxation will vary depending on individual circumstances. This article does not constitute advice or a recommendation; please consult a financial adviser.