As the final echoes of Auld Lang Syne fade away, the start of the new year is the perfect time to review your finances and take stock of where you’re at – and where you’d like to be. From savings and investing to pensions and protection, it’s well worth making some changes now, as a few simple steps could have a big impact on your money situation, not only for the next 12 month, but potentially for many years to come.
When it comes to New Year’s resolutions – whether physical or financial – picking up some good habits is much better than trying to change everything overnight. Alice Haine from Bestinvest, said: “Committing to a fresh set of resolutions has the potential to not only spruce up your personal finances for the year ahead, but also improve your long-term prospects.” Here we take a closer look.
Reconsider your financial goals
The start of a new year is a sensible time to revisit your financial goals. This means standing back and reminding yourself of what you’re hoping to achieve over the short, medium and long term. If your goals have changed, you may need to review and adjust things, such as where you are squirrelling your money, or the level or risk you are taking with your investments.
Build an emergency fund
If you don’t have this vital savings pot in place already, now is the time to get serious about slotting money away in a rainy-day fund. This will act as a safety net to cover unexpected expenses, such as a broken washing machine, car breakdown or worse, job loss.
Your emergency fund should be equivalent to between three and six months’ worth of outgoings, and should be held in an easy-access account – separate from your current account. The best easy-access accounts currently offer inflation-beating returns of just over 5%. But get your skates on, as expectations that the base rate has already peaked raise the likelihood that the best deals will disappear soon.
Get into the savings habit
A good way to get into the savings habit in 2024 is by setting up a standing order or direct debit to move money from your current account into a savings account on the day you get paid. That way, you’ll hardly notice the money leaving your account.
Automatic transfers are an effortless means of contributing towards your savings, helping you build a habit not just for this year – but for the long term. You can then know exactly how much you have left for everyday expenses while your money works hard in the background.
Be sure to check your cash is earning a decent rate of interest. If you’ve had your savings languishing in an old account for a few years, chances are that it’s not. Check and compare savings accounts and cash ISAs using a site such as moneyfactscompare.co.uk and move your money to the best accounts on offer. But don’t delay, as high-paying accounts may not hang around for long – be sure to benefit while you can.
Think about investing
If you’ve already got a rainy-day fund in place and are turning your attention to goals that are at least five years away, this could be the time to start thinking about dipping a toe into investing. While cash savings have their place to cover planned expenses in the next five years, your hard-earned money is at the mercy of inflation. This is where the stock market comes into play.
You may be worried about volatility, but, what you need to bear in mind is that while markets will go up and down, over the long term, investing has the potential to beat inflation. Remember you can also select investments that suit your risk appetite – plus you can diversify your money across different sectors and countries, as well as across different asset classes. Moreover, you can dip a cautious toe into the water with as little as just £10 or £20 a month to begin with.
Once you’ve made the decision to invest, remember that it’s a long-term game. You need to be comfortable with the idea of tying up the money you are thinking of investing for at least five years – and ideally, more.
Give your pension the once-over
If you haven’t checked the value of your pension pots recently, the start of a new year could be the ideal time to do so. You need to assess whether you’re on track to reach your retirement goals. Start by checking your State Pension forecast. You can do this by visiting gov.uk/check-state-pension.
You should also receive an annual statement from any workplace and personal pensions – these will be sent by your provider. Check out online pension calculators that can help you decide if your current pension payments will be enough to fund your retirement lifestyle. If there’s a shortfall, it’s worth seeing if you can up your contributions. You can make additional payments into your pension at any time. To top up your private or workplace pension, you can usually make both regular and one-off lump sum payments.
Pensions are a really tax-efficient way to save. Thanks to pension tax relief, it will cost you less than you might think to pay into your pension plan. Most basic rate taxpayers get a 25% tax top up on their contributions. So if you pay £100 into your pension, HMRC will effectively add another £25, bringing the total to £125. Higher rate taxpayers get a further 20% in tax relief and additional rate taxpayers an extra 25%.
If you have a workplace scheme, your employer will contribute, too. It may not feel like a priority, but a little saved now can make all the difference once you reach retirement. Remember, time in market will make a huge difference to your pension so small contributions can build into a substantial pot over the long term. While you’re at it, don’t forget to track down any lost pensions, too. The Government’s Pension Tracing Service is a good place to start.
Make the most of your tax allowances
You may be used to waiting until the end of the tax year in April to maximise your tax allowances, but there’s nothing to stop you doing so sooner. You can tuck away up to £20,000 into ISAs each year, where no income or capital gains tax will be due when your money is growing or when you take it out.
While a cash ISA offers a tax-free space for regular savings, dedicating too much to cash misses out on the benefits that come with an investment ISA. If you’ve got medium to longer-term financial goals – and a time horizon of five years or more – a stocks-and-shares ISA is likely to be the better bet.
At the same time, given the capital gains tax exemption is due to be slashed in April, it’s worth acting now to maximise your tax-free investment gains. The individual annual exemption amount was reduced from £12,300 to £6,000 in 2023 and will be cut further to £3,000 from April 2024.
Get protection in place
If you’ve yet to get protection policies in place, now is the time to think about the likes of income protection, critical illness cover and life insurance. Policies such as these will ensure your loved ones are looked after in the event of unexpected illness or death.
Income protection cover pays a regular income if you are unable to work due to illness or injury, and critical illness cover provides a tax-free lump sum, payable if you contract one of a list of specified conditions. Life insurance will pay out a tax-free lump sum if you were to pass away.
If you’ve already got protection, it’s a good idea to ensure your policies still offer the right level of cover for your needs. You don’t want to leave loved ones short, should the worst happen. Getting the right protection products in place could be one of the best things you do for your family, giving them long-lasting financial stability.
Write a will
The start of the new year is also a good time to sit down with loved ones and discuss your will. That might mean navigating some tricky conversations with your children about what happens to your money when you die. But if you end up all on the same page about who is getting what, this will save a lot of heartache in the long run.
By writing a will, you can be sure your assets are distributed according to your wishes. And if you’re thinking about leaving a gift to a good cause in your will, check out Remember A Charity. If you’re already made a will, now could be a good time to check if it needs updating. This might be the case if your circumstances have changed in any way. Also take the time to draw up a ‘lasting power of attorney’, and to ensure beneficiaries on all accounts and insurance policies are up to date.
Get financial advice
When it comes to your finances, you can find yourself faced with lots of complicated questions about where to invest, how much to save for retirement, how to avoid paying too much tax, and what protection policies are best for your needs. If you’re not sure of the answers, it may be worth thinking about getting some financial advice. This could help you feel more confident and make a real difference to your financial future. To read more about finding a financial adviser, head here.
As a lower-cost alternative, consider consulting a financial coach who can help you decide the best way to reach your big savings and investment goals.
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