It’s always worth spending the time to review where you are financially. Reviewing your finances at least once a year allows you to stay on top of what's working for you and, more importantly, what's not. You can then take the lessons you've learnt to make the next 12 months your most successful year yet. Not sure where to start? We'll show you how to review your finances and make changes to reach your goals.
Your starting point - how much are you worth
Firstly - you need to look back at what your finances were like last year, then compare that to where you are today. This may seem daunting but will give you an accurate overview and put you in a stronger position to make better financial decisions. Log into your online bank account, or pull out old statements. Write down everything you owned and everything you owed - both at the start of the year, and today.
Write out the balance of your bank account, savings accounts, investment accounts, pension pots, and the value of key possessions like your house or car. You could use a site like zoopla.co.uk that will give you a rough estimate of the current and past valuation for your property. Next, list out everything and everyone you owe money to - mortgage, overdraft, credit cards, and friends or family. You’ll need to subtract everything you owe from everything you own, which gives you your net worth. Compare what you were worth at the start of the year, to what you are worth now.
Hopefully, that number has gone up - either because you paid down debt, or because you’ve added to your savings and investments.
Review each part of your finances
Once you’ve got this overview, it’s worth looking at how your savings, pension and any investments are performing, and whether debt repayments are on track. Each one has different features and restrictions that will affect the amount they earn. For instance, investments carry a higher risk and larger potential gains than savings accounts, so could fall in value one year but rise higher the next, so take this into account.
If you think you could get more out of your savings elsewhere then consider switching your savings account. Remember, banks and building societies usually benefit from people sticking with them out of habit, so if you aren't getting what you want from them, take action. If you have access to Salary Finance Save, take a look to see whether it would work for you.
When doing a check of your pensions, you want to look at a few things - which should be provided in annual updates from your pension provider.
If you think you’re not going to have the retirement you want, consider increasing your pension contributions (even just by an extra 1%).
Investments can go up or down. Short-term changes are not always a problem, because your investments should be aiming for longer-term goals where you have time to weather the changes before you reap any benefits.
As part of this year-end reflection, check how your investments (whether cash, property or shares) have performed this year. If you have a particular proportion of asset types that you are trying to stick to (e.g. 60% shares, 40% bonds and cash), then check to see if you need to rebalance your portfolio to stay within this. Look at financial advice if you are unsure.
If you can make a habit of reviewing your investments consistently then it can provide a helpful comparison which will inform your future investment decisions.
Your debt and credit repayments
Debts form part of our overall finances and repayments should be reviewed to see if you can save money. Find out what interest (APR) you are paying and take a look around the market to see if the interest rate you're being charged is still competitive. If you have a mortgage rate change coming up - look around at different options, and make sure you can afford repayments moving forward. On the other hand, you might be wanting to pay off your mortgage sooner - so think about whether you can overpay a lump sum if you have a fixed rate that is ending soon.
If you have a personal loan, it's worth checking whether you can switch providers to save you money on your monthly repayments. It's a bit like switching energy providers to one that can offer you a better deal. At Salary Finance we offer loans repaid through salary, which could help you consolidate your debts into one - to find out more, click here.
Your tax efficiency
The tax year ends in April, so check if you're making the best use of the various allowances available to reduce the tax you pay before the end of the year.
You can earn up to £12,500 in the 2020/21 tax year before income tax is due and you can pay up to £20,000 each year into one or a combination of a cash / investment ISA, tax-free. The maximum annual pension contribution is £40,000 and the lifetime limit is currently £1m. You receive tax relief on contributions - meaning you essentially get free money from the government when you contribute.
If you are selling shares or property remember to use your Capital Gains Tax allowance.
Congratulations - you’ve now got a great overview of how things went for you this year. The final step is to think about what goals you want to set for the next one. If there was anything that came out of this review, then make sure that you schedule time to take action and make these changes happen.
To help you move forward on your journey, make yourself a simple, actionable checklist, perhaps with some of the following:
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