Local finance company Combined Financial Strategies Ltd offers TBE readers their top tips for being financially fit for 2014.
The first three steps to getting financially fit are very simple and is the bedrock of any future financial planning. We base our advice on the old saying “plan for the worst but expect the best” as most our clients relate to this as being the main reason they initially seek our help with their finances.
1) Clean up your finances
It is important to fully understand the main risks to your finances and to pay off any expensive debt as quickly as possible. Be careful of penalties for early repayment but if you can, you would normally repay your debt in the following order (unless you have a special deal):
- Credit Cards/Store Cards
- Short term loans
Paying off debt helps free up your disposable income and takes away the biggest risk to your finances.
2) Build a realistic emergency fund
We would not recommend that our clients invest or make sizeable pension contributions until they have paid off all their accessible short term debt and build up enough savings that could help them through a period of illness or unemployment.
As a rule of thumb we recommend at least 6 months living expenses as an absolute minimum that should be kept accessible at all times. This is in addition to the house repair/holiday/Christmas account and should only be dipped into as a last resort.
It is this savings buffer that then allows our clients to make longer term savings/investment/pension decisions. Risk is needing to get your hands on your money at the wrong time in the economic cycle. If you can afford to wait through any future downturn then you give your investments a chance to recover and get back to profit.
3) Take advantage of Tax Incentives
Taking advantage of tax incentives gives your investments a head start.
Pension contributions are very useful tax planning tools especially in the ever more complicated tax world we live in. However, it is especially so if you are in one of the following earnings bands:
- £50-60,000 gross pa – if you earn more than £50,000 you start to lose your entitlement to Child Benefit (if you have young children). However, a pension contribution can be used to reduce your taxable earnings below £50,000 and preserve this benefit for your family.
- £100,000-£118,000 gross pa – for every £2 earned over £100,000, you will lose £1 of your tax free personal allowance (currently the first £9,440 of your earnings is not liable to income tax). Again making a pension contribution could be used to reduce your taxable earnings below £100,000 and protect your Personal Allowance.
- If you earn above £150,000 gross pa you will pay 45% income tax on the excess. Therefore any pension contribution would generate tax relief at the equivalent 45% rate.
But remember there are annual and life-time limits to the amount that can be invested into Pensions and you cannot access any of the capital until you reach age 55 at the earliest.
If you need access to capital in the future then we would recommend Investment ISAs as a good way of saving that really compliments any Pension savings for Retirement.
Saving in an ISA means that any investment does not add to your income tax bill and it is not liable to capital gains tax on any growth you achieve through the years.
This is really important in retirement because you can take income from ISA investments and not incur personal income tax for doing so. If you have a pension all income generated is liable to income tax (although you can draw the first 25% of the fund value as a tax free lump sum).
For further advice from Combined Financial Strategies visit: www.cfsorg.com or contact Jonothan McColgan E: firstname.lastname@example.org T: 01225 471462