Twelve simple steps to better finances
By Mike Narouei, Content Producer at Boring Money
9 May, 2017
Dependable Dad and financial commentator Jason Butler gives us 12 no-nonsense tips to make your money go further.
Understand what you are spending and why
If you find it hard to accumulate wealth or are accumulating or not repaying debt, the chances are you don’t have a handle on your expenditure. We all tend to under estimate how much we spend, whether that be regular or one off purchases. Humans are also not ‘wired’ to make good financial decisions, partly because we make most buying, saving and investing decisions based on emotion NOT logic. This usually stops us from having the best financial outcomes.
The first thing to do is to analyse your current spending, either by downloading your bank account transactions to a spreadsheet or using one of the many financial management apps that link to your bank accounts. Money Dashboard, Money Mojo, Money Info and Money Hub are just some of the free apps that can help you analyse what you are spending based on a wide range of categories. I was surprised to find that I spend about £500 a year on books and £650 a year on coffees!
All spending is based on fulfilling a need. The key is to think more intentionally about whether spending is the right strategy to meet that need. For example, when you pop out for a mid-morning coffee each day, is the real need to take a break from the office or be around people? Could you meet your need without spending money each day on a coffee? In my case I work out in the gym most days and my coffee is my reward for keeping fit and lean, so I’m not prepared to give it up.
Make small but effective changes to your spending
Once you know what you are spending and the need that it meets, you can start to make small but effective changes. For example, could you take a packed lunch to work and direct the money saved into your pension? Next time you are tempted to buy something from Amazon, why not add it to your wish list and at the end of the month buy, say, half the items on the wish list and put an amount equal to the value of the items not purchased into a savings account.
Next time you get a pay rise or a bonus, why not direct a proportion of this into savings, because what you haven’t had you don’t miss. Could you refinance your debts to a lower rate but keep the repayments the same or even higher, so you repay the capital faster and thus pay less interest overall? Remember, saved interest is the same as a guaranteed net of tax investment return.
Speak to your children about their human capital
Human capital represents a person’s ability to generate income and wealth from working, developing an idea or building a business. As a general rule human capital is highest when we leave education and gradually declines as we reach old age. The higher your human capital and the more of it you save throughout life, the quicker you’ll be financially independent.
Some young people who are hardworking, intelligent, and can achieve good grades in academic subjects and those who need a degree to pursue a specific career, might find university good value. If so they need to view tuition fees as a deferred future tax charge (paid on earnings over £21,000 in England and Wales), not as a debt burden.
However, recent research by Aviva found that about a third of recent graduates regret attending university and about half reckoned they could have got their job without a degree.
Therefore, some young people would get much better value from doing a modern apprenticeship or the new graduate level apprenticeship. As well as learning a trade it is possible to do apprenticeships in professions such as accountancy, computer science and law. This will not only avoid them having to repay student loans in the future, but reduce the financial strain on you!
Protect your human capital
If you become seriously ill and unable to work, then your human capital is at risk, and unless your earnings are insured, your financial security is in jeopardy. If you have dependants and you die without life insurance, then their financial security is at risk.
If your employer doesn’t provide any or sufficient insurance against illness or death, then the two most important policies you must arrange are i) income protection insurance against illness/disability and ii) a family income benefit policy (this is low cost life insurance paid in instalments). Unless you are single, you’ll also need life insurance against any mortgage. Annual premiums are about 5% cheaper than monthly premiums, so pay annually if you can.
Speak to your parents about their money
People are living longer and this can mean a longer wait for their beneficiaries to receive any inheritance. While in some cases elderly parents may need to retain their wealth for their own needs in many situations they can afford to pass at least some of their wealth to their adult children or grandchildren.
Have a sensitive conversation with your parents about their financial situation and explore their desire and ability to pass on some of their wealth now, when it would have the most impact on your and/or your children’s lives, rather than in 10 or 15 years when it will be less useful. I have seen many examples of elderly people with far more money than they will ever need under any scenario, while their wider family struggle financially, only to leave significant amounts to on their subsequent death many years later.
Make sure you use all your allowances, exemptions and reliefs
UK tax rules are now quite complex, with different types of income subject to different allowances, tax rates and reliefs. It is therefore important to arrange your affairs so that you have the ‘right’ type and amount of income i.e. interest, dividends and earnings. If in doubt check with a professional adviser.
Cash gifts to registered charities (or a charity account like that offered by Charities Aid Foundation) expand the basic rate income tax band, which can enable you to avoid the child benefit tax charge, reclaim your personal allowance and have gains taxed at the lower rate 10% rate. It is also possible to pay a charitable donation anytime between 6th April and 31st January and carry it back to the previous tax year.
Gifts of assets, including investments, have the effect of reducing total taxable income, and may be preferable, particularly if such assets have unrealised capital gains that would otherwise cause you to pay tax at up to 28%.
Minimise costs on financial products and services
Many investment funds, pensions and investment services incur total costs of between 1.5 to 2.5% per annum. In a low return environment, this means that, after inflation, your money may well be falling in value. Every penny saved on financial costs is more return available for you. In other words, you get everything you don’t pay for.
Investigate whether you can save money by switching your existing capital into lower cost and more efficient alternatives. Organisations like Alliance Trust Savings, AJ Bell and Hargraves Landsdown all offer low cost investment platforms that enable you to access pension and Individual Savings Account tax wrappers and to invest in a wide choice of low cost investment funds. Look to keep total costs below 0.50% pa.
Consider backing young businesses
Investing in start-up businesses can be very risky but as well as potential capital gains they offer a range of tax benefits. Enterprise Investment Schemes, Social Impact Investments and Venture Capital Trusts all offer up to 30% income tax relief in addition to other tax advantages. The Money Advice Service has a simple explanation of how these work. You can source a range of investment opportunities from various crowd funding websites of which Seedrs is one of the largest.
Direct monthly savings into regular savings accounts
Many monthly savings accounts typically pay interest of 5% pa and with basic rate and higher rate taxpayers now able to earn tax-free interest of up to £1,000 and £500 respectively, this is a better bet than most cash ISAs or standard savings accounts.
Consider renting a room in your house
You can receive up to £7,500 per annum tax-free from renting out a room in your home, so if you have a spare room this could generate a very useful amount of additional income.
Ensure that you have a living and dying will
It is absolutely essential that you put in place a Property and Financial Lasting Power of Attorney and have this registered with the Office of the Public Guardian. This will enable whoever you grant power to handle your finances in the event that you are unable to do so. Apply online here to make a lasting power of attorney. It’s also essential to make a will which sets out your wishes. This can be as simple as a handwritten note or a comprehensive legal document. Whatever you do, make sure it is witnessed by two independent people and tell your next of kin where it is stored.
There is no magic to being good with money. You just need to be intentional, organised and disciplined. That way you can spend more time living and less time worrying.