Ten ways to avoid financial meltdown in 2012
Tuesday, 03 January 2012 04:18
By Kate Saines
If you thought things were bad in 2011, this year looks set to be even more of a challenge on our wallets, purses and bank accounts.
Everything from the crisis in the Eurozone to rising fuel bills are making life tough for many of us as we embark on 2012. But instead of panicking, why not use the dawn of the New Year to make a fresh start where your finances are concerned?
With a bit of planning, some budgeting and a spot of tweaking here and there we can all overhaul our finances for 2012 and avoid full-on financial meltdown.
Here’s our ten-point plan.
One: Plan ahead and make managing your money your New Year’s Resolution
It’s a sad fact, but most New Year’s resolutions are broken before January comes to an end. But by actually putting a financial plan into action before the novelty wears off you will ensure you have very little work to do for the rest of year.
So, while you still have some enthusiasm, sit down and write a budget. List all of your monthly outgoings, any debts which need attending to and weigh this up against your income.
If it looks like you might be heading for debt or there’s not much left over at the end of the month, see if you can find ways to reduce your spending and outgoings (there are more tips on this below).
Is it time to start shopping at cheaper stores? Cutting out luxuries? Or, even more drastically, finding a second income?
Then set yourself some realistic financial goals. For example, if you have accumulated Christmas debt set yourself a deadline for paying this off and put aside money each month to make repayments. Setting up a direct debit will ensure you cannot do a u-turn on this resolution.
Look at your diary to see if there are any big events in 2012 which are likely to bleed your bank account dry. Weddings – even if you are a just a guest – can make huge holes in our wallets, as can holidays, big birthdays or essential home improvements.
Likewise, there are usually months which see us forking out more than others. Anyone whose car insurance, road tax and MOT are due at the same time will know this can blow the budget in a major way, for example.
Consider setting up an instant access savings account to put away cash to pay for these kinds of events. Set up a monthly direct debit from your current account to ensure you inject enough money each month.
Teresa Fritz, consumer finance expert at MoneyVista, an online financial planning service, said: “January is a great time to start a financial detox by taking control of your savings and slim-lining your spending.
“The trick to setting the best resolutions is to be realistic. For many of us, seeing our financial future can be a tough reality to face.”
Two: Start tackling debt
Many of us will start 2012 in debt. Whether this is a long term burden we have been paying off for years, or just the usual Christmas hangover, the New Year is a good time to start looking at how we can reduce or even abolish it altogether.
David Black, insight analyst for banking at financial research firm Defaqto, suggests prioritising debt and paying off the most expensive first. “If you are in a position to do so,” he added, “think about using some of your savings to pay them off.
“The interest rates that are charged on store cards, credit cards, unsecured loans and overdrafts will generally be much higher than you can earn on your savings account.
“The highest paying fixed-rate bond pays 4.7 per cent whereas the average rate charged by a credit card is 18.8 per cent APR.”
If you have no savings, considering switching to a zero per cent on balances credit card. Alternatively, if you have several credit cards with such huge debt it’s not possible to transfer to another card, consider consolidating with a loan.
Personal loan rates, according to Moneysupermarket.com, hit their lowest levels in four years in November.
Kevin Mountford, heading of banking at the website, said: “Swapping a £7,500 five-year loan at an average rate of 15.41 per cent APR to the first direct loan at 6.8 per cent would generate an annual saving of £325.40.”
Three: Put your mortgage under the magnifying glass
If you are fortunate enough to be on the property ladder, it will also be worth looking at your current mortgage deal when carrying out your New Year finance revamp.
Anyone about to finish a fixed-term mortgage should start shopping around for other deals on the market to see if there is anything available which is cheaper than the lenders’ standard variable rate (SVR).
And anyone currently paying the SVR should do some research to see if there are any better deals out there. While many lenders’ SVRs are currently quite competitive there are still products, trackers in particular, which could be cheaper over the next year.
Moneysupermarket has calculated switching a £150,000 mortgage from the average SVR of 4.83 per cent to the current market-leading two-year tracker rate from first direct, which is 2.08 per cent, would create a saving of £1,207 annually.
Find a mortgage that fits your circumstances
Four: Ensure you are not paying too much tax
Getting a grip on your tax allowances might sound like an arduous prospect but it could be a worthwhile exercise. Probably the most obvious error we all make when it comes to tax is not taking full advantage our ISA allowance each year.
Moneyvista recommends if you have not opened an ISA allowance this year – don’t wait, and act now. If you have, then check how much of your tax-free ISA allowance you’ve used so far this year and if you have savings elsewhere, move them to the ISA.
Remember, the cash ISA allowance for this tax year, which runs from April 2011 to April 2012, is £5,340.
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Five: Start saving for a pension or paying more attention to the one you have
2012 is the year of auto-enrolment. This means most employers will be obliged to offer their staff a workplace pension and will automatically enrol their employees into the scheme.
Staff have the option to opt out, but with so few people saving for a pension these days it may be worth not looking this particular gift horse in the mouth!
Meanwhile if you do have a pension, how about giving it some attention? It might be worth taking a look at the nuts and bolts of your plan and seeing if you can make any changes to earn yourself a better return.
Compare pensions - Take control of your finances
Read more: Take control of your pension - don't ignore it
Six: Switch your current account
Many of us take our current accounts for granted. We have probably even been using the same one since we left school. But switching to a different account could actually save us – or earn us – money.
A great and simple way to shake-up your finances in the New Year is simply to find out what your current account is offering you, and see if there’s another one which can give you more.
Kevin Mountford of Moneysupermarket said switching your current account provider to one that pays a good rate of interest could earn you some additional cash.
The Santander Preferred current account pays five per cent on credit balances, for example. But it’s worth shopping around and keeping your eye on the market as the year progresses as banks often run promotions, luring customers in with new deals which can include cash incentives.
Halifax is offering a £100 switching incentive for new customers up until February 19th 2012. http://www.myfinances.co.uk/savings/2012/01/03/halifax-extend-100-current-account-switching-offer
On the other side of the coin, it might also be worth giving your bank the once over if you are on a packaged account. Are you using all the benefits on offer, and if not, are the perks you are taking advantage of worth the money?
Use our comparison tool to compare current accounts
Seven: Switch utility and communications providers
Even bigger savings can be made by switching utility providers – specifically those providing energy. You should firstly ensure you are on the correct tariff for your energy consumption levels and region, and then scour the market for a better deal.
Read more: A step by step guide on how to find the cheapest energy deal
But you can also reduce consumption by taking practical measures such as turning the thermostat down a degree, insulating your loft or getting cavity wall insulation.
Meanwhile look at bundling your TV, landline and broadband into one deal, if you haven’t already. This is a tried and tested method of making savings. Again, you’ll need to do a bit of research and scour the market to see which deals suit you, but it will be worth the effort.
Compare gas and electricity suppliers and save money on energy bills
Eight: Reduce your insurance costs
Essential insurance policies such as home and car insurance can be very costly. But there are plenty of methods you can employ to reduce the cost.
Paying annually for home insurance instead of monthly is a quick and easy way of cutting premiums, as is increasing the voluntary excess on your car insurance.
If your policy is about to expire, make sure you don’t just opt for your current insurers’ renewal quote. Shop around, do some research and you are bound to find a cheaper deal.
Our guides have lots of top tips on how to get better premiums.
Five ways to cut the cost of car insurance
How to cut the cost of your home insurance
Nine: Open a savings account
We’ve already mentioned how opening an instant access savings account is a great way to put money away for ‘big spending events in 2012’ or even emergencies.
But if you have some spare cash left over from your salary each month, it could pay to get this money working for you by finding a suitable savings account.
Make sure you use your ISA allowance as you’ll earn tax-free interest on your savings this way. Make sure you look around for the best interest rates, and don’t forget to check what kind of access the account provides.
David Black of Defaqto advises you also take advantage of introductory bonuses. He said the average rate paid by instant access accounts offering these bonuses is 2.16 per cent – much higher than the 1.13 per cent offered on the equivalent non-bonus accounts.
Make a note of when the bonus period ends, however, and switch to another bonus-paying account on this date.
Compare savings accounts and ISAs
Ten: Go (sales) shopping
January sales might not be the best option if you are already wallowing in debt after Christmas. However, if you have some money to spare and want to make the most of the bargains out there you could use the sales to your advantage.
By planning ahead you could get some early birthday presents or even clothes in larger sizes that will fit your children next winter.
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