The beginning of any new year is a good time to review your financial situation – but it is especially important in 2021 given the tumultuous 12 months that have just come to an end.
The pandemic has created new challenges for individuals’ finances, but there are some significant opportunities as well. While Covid-19 and the resultant lockdowns have damaged the economy overall, limits on travel and the closure of hospitality and leisure venues means that for many people, their surplus disposable income has risen. It is important to use this extra cash wisely – for example by paying off debts or building up a financial buffer for the future through investments or a pension.
So here are some tips to consider when looking at the overall state of your finances in 2021.
Check the cost of credit
Interest rates remain at all-time lows, but that doesn’t mean that you can’t be paying too much for the likes of credit-card borrowing or overdrafts. Rates on this type of short-term credit tend to be much higher than on, say, your mortgage – so pay off these debts as a priority and try to avoid dipping into your overdraft every month.
Get ready to move your mortgage
The rate of interest on your home loan is likely to be much lower, but it is well worth looking for the best deal given the amount of money involved. Find out if you’re currently tied in to a fixed-term portion of your mortgage – usually the first two to five years – and make a note to look for a better rate shortly before it runs out. If the fixed period has already expired, you’re probably paying over the odds, so now is the time to shop around.
Make sure your pension is on track
Reviewing your pension on an annual basis is a must to ensure you’re on course to retire on time and with enough money saved up for a comfortable old age. Use one of the many online pension calculators to check, but remember: you might need to increase your monthly contributions if you want to retire earlier than originally planned.
It’s also a good idea to double-check the fees charged by your pension provider: you may be able to save a lot of money by switching to a more competitive rival.
Assess your investments
Keep a close eye on your non-retirement investments, including any tax-efficient schemes in your country (such as stocks-and-shares ISAs in the UK). One of the key reasons for reviewing investments is to ensure your portfolio has a level of risk you are comfortable with – and this level may well have changed over the past 12 months with parts of the economy once viewed as low-risk becoming more volatile due to the conditions created by the pandemic.
Similarly, if you are an income seeker, there is a chance you have been forced to hunt for a decent yield in more risky waters given the low rates on savings accounts; so check whether you remain comfortable with the risk your money is exposed to.
Compare your investments’ recent gains or losses to those of funds with similar risk levels and in similar assets to ensure you are not suffering from below-par performance. And, if possible, if you are in the UK it might make sense to use up your annual £20,000 tax-free ISA allowance before it expires on April 5.
What does 2021 hold for investors?
There remain a number of sources of uncertainty for investors this year, with the Covid-19 pandemic – and the world’s response to it – continuing to loom over the economic landscape, says William Davies, CIO EMEA at Columbia Threadneedle Investments.
“We see three themes dominating 2021: the development of a Covid-19 vaccine; the political make-up of the US following the November election; and Brexit,” Davies explains. “We know that while the end of the pandemic is coming, the fundamentals are likely to deteriorate first because many economies are still shutting down – it is getting worse before it gets better.
“But markets have begun to look through the short term to the sunny upside of the vaccine-led recovery.”
Davies says that the rapid development of vaccines could lead to an earlier economic recovery than expected, with a return to pre-pandemic levels possible – but far from certain – by the end of the year.
In the United States, he adds, the Democrats’ control of Congress will probably lead to further stimulus measures in the short-term, while Brexit means there is extra pressure on the UK government to build relations with America.
Davies says: “Companies in the UK appear cheap, which is evident in the rising number of takeovers, mergers and acquisitions. With that in mind, I believe any positive news – be that vaccine-related, Brexit or otherwise – could open the door for a stronger performance from UK equities in 2021.”
Meanwhile, Davies believes that the ongoing economic challenges mean that high-yield credit – which is often linked to high levels of operational borrowing by issuing companies – is likely to be less attractive than investment-grade bonds in the coming year.
If in any doubt about your investments, do seek the advice of an independent financial adviser.
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 14/01/2020.
