The start of the year is the ideal time to overhaul your finances and make sure you’re not paying over the odds on outgoings such as mortgage and utilities bills, while also checking your savings and investments are on course to meet your medium- and long-term goals.
While there has been some degree of political and economic uncertainty both in the UK and around the world over the past year, stock markets have in general performed well, while interest rates remain low. But that doesn’t mean that your investments or pension should be left to their own devices – and it may be possible to get an even cheaper home loan, especially if your property has increased in value.
The key to improving your financial wellbeing is to tackle the small things (utility bills) as well as the large things (pensions/investments). Indeed, if you sort the former, there is a higher chance you can improve the latter, creating longer-term wealth for you and your family. For younger people, who tend to have more money worries, this is especially true.
Indeed, a recent survey by Columbia Threadneedle Investments1 indicated that an increasing number of young people were worried about how to afford Christmas. According to the survey, 55% of 18 to 38-year-olds (the so-called millennials) expressed concern over how they will afford the festive period; but this fell to just 19% for the 50- to 64-year-old ‘baby boomer’ demographic.
Check your pension is on track
Perhaps the most important element of your financial planning is your retirement fund – and it is worth checking at least once a year that your defined contribution pension is on schedule to produce the income you need at the point in time you intend to stop working.
The firm that manages your pension may send you an annual statement setting out how much it has increased in value in the previous 12 months, as well as what it might be worth by the time you reach retirement age.
You can also use an online pension calculator to see how feasible it might be to retire earlier, for example: this can help you work out how much extra you need to pay into your pension every month in order to stop work, say, three years earlier. But bear in mind that these forecasts are based on certain assumptions about future growth levels, which are of course not guaranteed.
Review your other investments
If you have other stock market-linked investments such as ISAs (individual savings accounts) or direct investments in collective investment funds, you should also carry out regular reviews to ensure that they are performing adequately and that the risk levels are still appropriate to your circumstances – this kind of review can be applied to your pension as well.
Don’t think just because your investments have grown in value over the past few months that there is no need to take action: you should compare your own funds’ or portfolio’s performance against that of investments in similar types of company or asset, and with similar risk levels. This will give you a better idea of whether your own investments’ growth has been above or below par.
Equally, just because an investment has underperformed doesn’t mean you should cash it in. But persistent underperformance against an appropriate benchmark can be a sign you need to make changes.
Think about your tax allowances
Investing through an ISA means that any investment profits are permanently free of capital gains tax, however large they are and however far into the future your investment ISA is cashed in. Over the course of many years and even decades, this can potentially result in a substantial tax saving for those who make the most of their annual allowance.
Check you’re not being overcharged on your mortgage
Even though interest rates remain low in the UK, it is still worth checking you are not paying more than you need to on your home loan. If an initial two- or five-year deal has recently come to an end, for example, you may have been moved from a cheap fixed rate on to your lender’s standard variable rate, which is typically a good deal more expensive.
This should be a signal to shop around for a new loan, either with your existing provider or a new lender. Bear in mind also that if your house has increased in value since you last updated your mortgage, you may be entitled to a lower rate on the basis of having more equity.
Prioritise expensive debt
If you have any spare cash at the end of each month, you might consider saving or investing it for a rainy day. But if you have any debts with high rates of interest – such as are often applied on credit cards – it can make more sense to pay these off as soon as you can to avoid interest charges mounting up.
Some people like to use extra income to pay down their home loan: this can help them become mortgage-free sooner, as well as reduce the total amount of interest they pay over the life of the loan.
But with typical mortgage rates relatively low at present, clearing this debt might not seem such a pressing concern – particularly if higher returns can potentially be achieved by investing in shares and other risk-bearing assets.
That said, if you are concerned about interest rates rising in the medium term, it can make sense to devote some cash towards clearing your mortgage balance more quickly.
Review household expenses
By using a comparison service or shopping around, you may be able to secure a cheaper rate on utilities such as gas, electricity and broadband – but watch out for any switching penalties that might be imposed by your current providers.
Important Information: Past performance is not a guide to future performance. Your capital is at Risk. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. This document is not investment, legal, tax, or accounting advice. Investors should consult with their own professional advisors for advice on any investment, legal, tax, or accounting issues relating to an investment with Columbia Threadneedle Investments. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. The mention of any specific shares or bonds should not be taken as a recommendation to deal. This document includes forward looking statements, including projections of future economic and financial conditions. None of Columbia Threadneedle Investments, its directors, officers or employees make any representation, warranty, guaranty, or other assurance that any of these forward-looking statements will prove to be accurate. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.
