Saving and managing your finances
By Rachel Williams
Most of us don't need to be told that we should be saving more and spending less. However, even when we think we're doing the right thing, we are often only acting on conventional wisdom, without paying any attention to our own goals and objectives.
Thinking through issues like your savings, investments, pension and
debts is the first step in getting your financial priorities straight. But rather than just carrying on managing them in the way you always have, the real challenge is to step back and think about your future financial needs.
Taking an objective view of your finances isn't always easy. It can mean challenging conventional wisdom and breaking the habits of a lifetime, so to help ensure you get your priorities right, we asked a panel of experts to highlight the five areas where we're most likely to go astray.
Saving when you have debts
It's sensible to have some savings in place in case of an emergency, but exactly how much depends on your circumstances. In an ideal world, advisers recommend having savings equal to three months' expenditure. To tackle your debt, try and get as much of it as possible transferred onto a credit card that charges 0% on balance transfers.
If your credit rating prohibits you taking out further credit cards, start by repaying debts with the highest interest rates first. For most people, that means store cards, overdrafts and credit cards - in that order.
The only credit it doesn't make sense paying off early is a student loan. Clearing this will certainly lift a weight off your mind, but with the interest rates charged on them so low, you'd be better off keeping your savings in a high interest savings account and sticking to your regular repayments.
Saving when you should be investing
It's understandable that anyone who saw the value of their investments plummet during the bear market of 2000-03 is still a bit cautious. During that time, the FTSE 100 dropped from a high of 6930 to a low of 3567. However, with the index back at over 6,000, those savers who have all their money in cash since then are arguably now paying the price for their caution.
Investors' first exposure to the stockmarket is often via direct shareholdings in companies. However, unless you have an enormous sum to invest, you'll struggle to build a well-diversified portfolio - which is crucial for low-to-medium-risk investors. However, if you buy into a fund, your investments will be spread across different sectors and companies.'
Justin Modray at Bestinvest says trackers funds can be a good starting point. As they aren't actively managed by a fund manager - they literally track particular indices - they are much cheaper than most funds. Modray likes the Fidelity Moneybuilder, which tracks the FTSE All-Share and charges just 0.1%.
Opting for a tracker fund might seem like a lazy option, but unless you're prepared to do your research or consult an IFA, it can be a good idea - particularly if the only alternative is picking a more expensive actively managed fund out of the blue.
On the active side, Modray says cautious investors could consider something like the Midas Balanced Growth fund, which is run by Simon Edwards. It invests in UK and overseas shares, commodities, fixed interest securities and commercial property.
Although this degree of diversification means it may not do as well when the markets are rising as funds that are 100% invested in equities, it offers more insulation when the markets fall.
Less cautious investors should consider AXA Framlington's UK Select Opportunities, which is run by Nigel Thomas; Rensburg Select UK Growth, run by Mark Hall; or Artemis Global Growth, which has Peter Saacke at its helm.
Investing too cautiously over the long term
'One of the biggest problems is that people are far too cautious with money that's invested over the long term,' says Mark Dampier. This is particularly prevalent when it comes to pension investing. 'If you've got 20-plus years before you can get your hands on the money you need to be in assets that, while they may be volatile, are going to go up a lot,' he explains. Dampier suggests funds that are 100% invested in equities and likes global funds.
Like Modray, he is a fan of Artemis Global Growth.
'And don't be afraid of using an emerging markets fund alongside UK small
companies,' he adds.
Dampier says investors often see volatility as the enemy, but as long as you don't need your money in the short term, the concept of pound-cost averaging means a drop in the market can actually work in favour of anyone making regular payments into long-term investments like pensions. 'When the markets are down you are able to buy more units, which will be beneficial when the markets start to rise again,' he
explains.
It's not just pension investors who can afford to take a risk with their investments - children can too.
Children with child trust funds (CTFs), for example, have a very
lengthy investment horizon and can therefore afford to ride out short-term volatility.
Making your mortgage your priority
With mortgage payments accounting for around a third of most incomes, it's no surprise that most people regard their home loan as a financial burden and see clearing their mortgage as their biggest financial goal.
Matt Pitcher, an IFA at Towry Law, says: 'The current generation are running scared of redundancy and want to get their mortgage down while they still have earning power.'
So, is your mortgage really the best home for your surplus cash?
Ultimately, the best approach is to strike a balance, advises Tom McPhail, head of pensions at Hargreaves Lansdown. If you are making healthy contributions into your pension, then overpayments into your mortgage make sense, but if your pension is under-funded, tackle this first.
'In principle, clearing your mortgage early is a good thing, because borrowed money is expensive money. But equally, it's hazardous to ignore your pension in favour of this. You could get to your sixties and have no mortgage but also have a tiny pension. You could then be in a situation where you'd have to look at options like equity release and downsizing,' he says.
Saving when you should be spending
The vast majority of us should be cutting back on our spending and squirreling more away into savings and investments. However, there is one notable exception. 'A big issue I have with some of my older clients is actually getting them to spend their money. They're taking their pension income but reinvesting it in other investments.
However, if you don't spend it, the Chancellor will end up taking 40% of it,' says Pitcher.
Inheritance tax is currently charged at a rate of 40% on everything in your estate in excess of £285,000, so Pitcher says that those in retirement who have spent their life saving should be able to relax and enjoy the fruits of their labour.
'People are often overly cautious about the cost of care. But you can still protect your capital and take an income. Your capital will remain at the same level and can be kept for care, but you get a higher standard of living.
The 10 tell-tale signs that your finances are in need of review:
1 You're in your 30s and you still haven't taken up your employer's pension.
2 You are squirreling money into savings even though you have credit card bills to pay.
3 You have credit card balances that aren't on 0%.
4 You haven't checked the performance of your investments in 12 months or more.
5 You are paying your mortgage lender's standard variable rate.
6 You are overpaying on your mortgage and don't have a pension (or are only paying in the bare minimum).
7 You shopped around for the best deal on your TV and latest mini-break, but haven't reviewed your insurance, current and savings accounts, gas and electricity bills and so on in years.
8 You've got enough in savings to cope with any emergencies, buy a new car, do up the house, go on a cruise, and yet this year's ISA allowance is still going into a mini-cash ISA.
9 You've got 30 years to go until you retire but you still describe yourself as a cautious investor.
10 You think your bank will offer you the best deal, whether you are looking for a new credit card, a personal loan, insurance or an investment.
Editor's note: Please beware that this article is directed at people living in the United Kingdom. Always seek expert opinions before making serious financial commitments.
With thanks to Interactive Investor where this piece first appeared
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