Numerous people have been impacted by the coronavirus (COVID-19) pandemic outbreak. However, this has surely been a period of reflection regarding our own money. Many people have utilised their extra time at home to assess their finances and determine what expenses are necessary and unnecessary.
Even if you have a good financial strategy in place, you should still check it frequently to make sure it still takes into account any changes in your situation. But what ought to be your current top priorities? When should you start thinking about your mortgage, ISA, or pension? Do you need to make an estate plan or should you invest more money in your children’s education? For full control of your finances former private pension plans—was it three, four, or five?, should also be reviewed.
Consider conducting a financial health check if you’re uncertain about the diagnosis to give your present financial status. But how do you begin?
1. Monitor and Manage Debt
All of your loans, interest due, and creditors must be fully clarified to you. Calculate how much you can possibly afford to pay down each month once you have totalled all of your debt and monthly expenses. With a debt consolidation loan, you might well be able to lower your monthly payments, cut down the number of lenders you owe money to, and cut down on the duration of paying off your loan.
In order to simplify monthly payments and save money over the long term, debt consolidation is a strategy that involves taking out a new loan to pay down the high-interest debt. Depending on your particular circumstances, you may want to think about personal loans, low-interest credit card balance transfers, or debt management plans, to name a few of the several alternatives.
For car loans, you can ask for a three-month payment holiday that must be filed by October 31. If you’re already on a payment holiday for car loans, you can request an extension of up to six months.
2. Control your Spending
Lacking a budget plan to control your finances, you won’t be constantly aware of where your money is going. By keeping track of what you’re spending, you may establish a baseline from which to measure your progress and catch spending errors before they spiral into serious personal finance issues. Once you make it a habit to keep track of your spending, you’ll discover that doing so helps you to be more aware of your daily spending choices.
For some people, one of the main sources of financial stress is the ongoing concern about where all the money went. A budget will help you keep track of every penny you spend, the issue becomes one of personal choice, which is much less demanding. On iOS and Android, there are budgeting apps that can be used to manage your money right from your phone.
3. Tax Allowance
There are several exemptions available for the 2020–2021 tax year, which spans from 6 April to 5 April. The personal allowance for income tax, which is the amount you can make before having to start paying it, is £12,500.
For the 2020–2021 tax year, the tax-free profit amount is £2,000 per person. Basic rate taxpayers pay 7.5% tax and higher rate taxpayers pay 32.5% on dividends earned above the £2,000 level. Dividend income in excess of the allowance is subject to a 38.1% tax for additional-rate taxpayers. Investments kept in an Individual Savings Account (ISA) or a pension is exempt from the dividend tax.
You are allowed to use your Capital Gains Tax credit each year. Gains up to £12,300 can be made in the current tax year (2020–2021) before Capital Gains Tax is due. Capital gains are taxed at 10% for lower-rate taxpayers and 20% for higher- and additional rate taxpayers. Second homes, including buy-to-let ventures, are the lone exemption. Basic-rate taxpayers will pay 18% in capital gains tax on these investments, while higher- and additional rate taxpayers will pay 28%.
Due to the full income tax deduction for pension contributions, saving £100 for retirement costs basic-rate (20%) taxpayers £80, compared to £60 for higher-rate (40%) taxpayers. According to the consumer price index, the lifetime pension allowance for the 2020–2021 tax year is now £1,073,100. The “annual allowance” for most persons to contribute to their pension in 2020–2021 is £40,000. For high earners with adjusted income of more than £240,000, the current taper level, the annual allowance tapers by £1 for each £2 of earnings, to a minimum of £4,000 per year.
This tax year, you are allowed to save up to £20,000 in ISAs, where all of your earnings would be tax-efficient. Regarding any investments you keep in an ISA, you are not required to pay income tax, dividend tax, or capital gains tax. The allowance may be divided across the three categories of ISAs: Cash, Stocks & Shares, and Innovative Finance. A Lifetime ISA allows for a £4,000 annual contribution that can be used to save money for retirement or the down payment on a first house. The Help to Buy: ISA is another option if you’re seeking to purchase a property, however it is no longer open to new savers. Before the Help to Buy ISA closed to new savers in December 2019, those who opened an account might save up to £3,400 in the first year and then £2,400 each following year. For the 2020–2021 tax year, the junior ISA allowance is £9,000. Child trust funds are subject to the same restriction (CTFs). In the past, it has increased yearly in step with inflation.
In order to avoid paying income tax on their savings income, basic-rate taxpayers can now earn up to £1,000. On savings income beyond £500, higher-rate taxpayers begin to pay taxes. For additional-rate taxpayers, there is no savings allowance.
4. Create a new Routine
Regular monthly investing encourages saving practise because it shows how little sums saved over time may grow into sizable nest eggs. People who don’t have a lot of money to invest at once or who are more careful about investing a single sum and prefer to drip-feed their money into the markets are considered to be ideal for regular payments.
When markets are unstable, as they have been this year, investing on a monthly basis can be an especially beneficial strategy. In times of high fluctuation, a monthly direct debit can be extremely helpful because it removes the emotional component of investing. Investing on a monthly basis also means that you won’t see as much of a change in the value of your investment, which might help in maintaining your attention on your long-term objectives.
Your regular contribution will buy additional units if there is a market correction. Furthermore, as the market increases, you will purchase fewer units, but the units you already own will be worth more. This averaging of costs over time is referred to as “pound-cost averaging.” You can change the size of your regular savings as your situation changes. Although you should aim to increase the amount when your salary rises, you do have the option to do so if your income decreases.
5. Increase your Pension
Checking your contribution to your pension funds on a regular basis is crucial if you want to receive the income you desire in retirement. However, you should be mindful that inflation might gradually reduce the value of your contributions over time, so it’s important to regularly examine them.
One of the best methods to save money is through pensions. Increasing your pension will contribute to improving your financial stability in retirement, and saving a little more now could have a significant impact on your future. The sort of pension plan you’re in and whether or not you use salary sacrifice will determine how the tax relief is applied. You can typically choose to automatically boost your payments each year by 3% to 5% in many pension plans. You shouldn’t worry about them keeping up with inflation because it’s likely to happen. If your salary increases, you ought to think about getting a bigger raise.
6. Concentrate on your Goals
If you don’t plan, you’re going to fail. How frequently do you set up goals? How frequently do you review your list of objectives? We all understand the value of having objectives, yet as we go through life, we often fail to recognise their value. By concentrating on these, you can prevent current events from distracting your attention and causing you to stray from your route.
Creating a strategy to achieve your short-, medium-, and long-term financial goals is the foundation of financial planning. It’s important to understand your finances and how to accomplish your goals. Setting goals helps in establishing new habits, directing your attention, and maintaining your momentum.
What changes might you expect in your life in a year? Do you feel secure in your ability to predict your financial future? When you stop working, will you be able to maintain your current standard of living? Have you set enough financial plans to support your lifestyle without going broke? Are you completely aware of your financial situation? What is “your number” to ensure the security of your present and future lifestyle? You have a much better chance of success in life when you put all of your attention toward accomplishing something.
7. Keep Going
Keep your financial goals from being ruined by the coronavirus pandemic. As you save for your future, there will always be some ups and downs, but as volatility increases and emotional distress comes in, this can cause you to lean more toward “flight” than “fight.” In order to live a happier, more fulfilling life, it is time to take action to change your connection with money and the role that it plays in your life.
8. Boost your Investing Strategy
Assess your investments carefully and search for ways to spread. Having a wide variety of investments is important because your current investment plan could affect your financial performance for years to come. Put simply, diversification is when you “don’t put all your eggs in one basket.” The idea is that the other investments will make up for any losses if one investment fails to generate income.
Investing in a variety of asset classes, such as stocks, bonds (commonly known as “fixed income,” real estate, and cash), is one way to broaden your investment. After that, you diversify among the various possibilities available within each asset class. The risk in your investment is reduced by diversification since various asset classes perform well at various points in time. Your strongest line of defence against one investment losing money or one asset type performing poorly is diversification. An investment’s total risk can be balanced out by including a number of investments with various levels of risk.
9. Control Your Emotions
Never forget that the secret to long-term gains is often “time in the market, not timing the market,” as the old saying goes. Investors may react emotionally in response to unexpected events like the COVID-19 outbreak and the subsequent instability in the stock market. This urge can be controlled by developing a plan in advance of market downturns and revising it while feelings are high. Long-term investors must continue despite the fact that short-term volatility swings can be painful to bear.
While it could be tempting to leave the financial markets, doing so could cost you the chance to profit from a potential market recovery. Thinking about your motivations for investing and your long-term financial goals is crucial at any time of market volatility.
10. Dividends are Reinvested
Dividend reinvestment is one of the most effective methods for increasing returns over time. You can massively increase your annual returns and overall wealth with reinvested dividends. You can either take the money and spend it as you would any other income when an investment you own produces dividends, or you can reinvest it.
Reinvesting your earnings can actually pay off in the long run, even though having the extra cash on hand could be tempting. You can just stop reinvesting the profits when you ultimately get to the point where you’d like to use them to supplement your income instead of investing them!