At this time of year many of us make resolutions to live a better, healthier life over the next 12 months; exercise more, eat less etc. But what about your financial health? Make 2021 the year you get a better handle on your finances. Eloise Hammond, Chartered Financial Planner at SeventySeven Wealth Management, suggests the best money resolutions to make in 2021 and beyond.
A financial health check forces you to assess your finances and re-focus your financial goals, whatever they may be. Financially, where are you now, where do you want to be and how will you get there? Another year might have gone by, but it might mean you’re another year closer to buying a new house, repaying your mortgage or retiring.
It is vital to regularly ‘sense check’ your financial planning, which includes reviewing any protection policies, ISAs, pensions and other savings you might have to ensure they are aligned to your overall goal. Eloise suggests following this simple checklist:
Review your budget: If you have any excess income, what are you doing with it? Where are your savings held and is it in a place that maximises their potential?
Emergency fund: Always make sure you have an emergency fund of circa three to six months of expenditure to act as a buffer – you never know when unexpected expenses might crop up. This may have been depleted after Christmas and the unusual circumstances in which we found ourselves in 2020. Note any shortfall and make it a priority to top up.
Short-term expenditure: Look at your short-term spending plans. By short term, we mean five years. If you have plans to spend an amount of capital within that time, perhaps on a new car, a house move or school or university fees for your children, then make sure it is held in cash funds to ensure it is easily accessible and not at risk to short-term market movements.
Once you have ascertained what money you can afford to save, you can start deciding where is best to invest. But before you make any firm decisions, enlist in regulated financial advice. By carefully structuring your investments, you can make the most of tax efficient savings for you, your children and grandchildren and avoid paying unnecessary tax on your gains and income.
Individual Savings Accounts (ISAs); Junior ISAs: You can pay £20,000 annually into an ISA and will pay no Income Tax on any income you receive. Any profits are also free of Capital Gains Tax. Meanwhile Junior ISAs are a great way to save tax-efficiently for your children. Family and friends can put up to £9,000 into the account on behalf of the child in the 2020-21 tax year.
Capital Gains Tax allowance: Any gains made within your business or when investing in shares or property are liable to Capital Gains Tax. This rate of tax varies depending upon your tax rate and also the type of investment you hold. The Capital Gains tax-free allowance for 2020-21 is £12,300 and it is vital to plan any disposals, possibly spreading them across multiple tax years where possible, to avoid paying excessive tax.
Tax free income: Alongside the capital allowances mentioned above, you have income allowances too. These comprise a Personal Allowance of £12,500; Starting Rate Tax band £5,000; Personal Savings Allowance of £1,000 and a Dividend Allowance of £2,000. If you structure your investments carefully and use all of these allowances, you can effectively take up to £20,500 tax free.
It's a good idea to make time to review your existing investments at least annually and ask yourself these three things: