7 ways to build your financial future in 2016

If your list of New Year’s resolutions is similar to that of others, it probably includes wanting to save more money. But, like vowing to get fit, this one is easy to fail at, especially if the plan of action is as vague as “I want to save more money.”

Success is much easier if you have a plan to follow, and as you are the one creating the plan you can ensure it is achievable.

Is your savings rate going to increase from 0% to 40% of your salary in one month? Probably not, so start with something you are comfortable you can do, which may be 5% or 10% in the first month.

Here are seven ways to change your financial situation in 2016:

1 PensionTackle debt

This one always tops the lists of improved finances, and for good reason. Loans and credit cards often have high rates of interest, making them incredibly expensive to have. Once you get rid of them you can use the money previously spent on repayments to put into savings and investments, so clearing them should be a priority to have greater control over your money. 

Quick and effective ways to help you clear debts faster include consolidating multiple debts, reducing your interest rate, and avoiding making the minimum payments. If you have debt you may wish to consider seeking debt counselling or loan restructuring advice. 

2 PensionIncrease savings

If you earn £10 an hour, every £10 you spend is one more hour that you have to work before you can retire. That’s a pretty big incentive to save! 

Many people try and save at the end of the month, hoping there is enough left after bills and spending. The problem is there usually isn’t money left – when we consider it available, it will be spent. 

To overcome this, pay yourself first. You can put the money into an easy-access account so you can use some of it if absolutely necessary, until you adjust to having less to spend.

To really make the most of savings you will want to get the highest interest rate possible and not lose the growth to tax, so high interest accounts and ISAs should be considered.

3 PensionPay into a pension

Pensions are perhaps the most efficient savings vehicles of all, offering not just tax-free growth but also tax relief on contributions and employer contributions in workplace schemes

This means if you are a basic-rate taxpayer and earn £100, you will receive £80 after tax. If you put that into a pension, it would be topped back up to £100 and in a workplace pension it could become £200.* This supercharges your saving efforts and can make a huge difference to the eventual size of your fund. Better yet, thanks to the new pension rules the money can be accessed in full from the age of 55. 

4 PensionDrive less

For many people, driving feels like an unavoidable essential rather than a luxury, and it’s true to say that it is an established part of life in Britain – but are all the trips truly necessary? 

Many households own more than one car, and often we only think about their cost with the headline prices – petrol, the price of the car itself, and insurance. But the truth is running a car is hugely expensive when you consider the other things, like wear and tear (such as tyres, brake pads, a new cambelt), windscreen washer fluid, tax, MOTs and servicing. 

As the illustration to the right shows, if you ran a car for 20 years the total cost including petrol, finance, insurance and tax could be a whopping £85,800

If you were to invest that money instead, it could return over £168,000 – for just one car! (You can run the numbers using your own costs using this calculator.) 

Next time you grab the car keys to drive to the shops, ask yourself if you could instead walk or pull the bicycle out of the shed. Not only will your bank account thank you, so will your health. 

5 PensionItemise outgoings

In this age of digital banking and direct debits, much of our spending is automated and it is easy to overlook where money is going.Switching utility and broadband providers can save considerable sums, as can switching to a cheaper interest rate if you have borrowings. You should also check for areas that can be cut back – is there room for reduction in the shopping bill, for example? 

6 PensionSave for things you know about

Some expenses in life are unexpected, but there are others that we know are coming but still surprise us. Christmas happens at the same time every single year, as do birthdays, anniversaries and even renewal dates for car tax and insurance. With a full 12 months’ notice on these, why do we wait until the last minute and then panic about the expenditure? 

To break the cycle, spread the cost over the year. If your car insurance is £400, set aside £33 a month (if your provider charges interest for paying monthly, the ability to clear it in one payment will also save you money). 

Decide how much you want to spend, in total, for Christmas and birthdays, and divide that number by 12 to see how much you need to save each month. This way you will always have the money put aside for the known occasions, removing one of the main temptations to spend on a credit card.

7 PensionPlan ahead

In keeping with the above, try to create a financial cushion for future expenses. For example, if you know that you want a child in five years, start stashing some money in a high interest savings account to help cover some eventual costs. Or your goal may be to retire in the near future, and extra savings will help with family holidays. 

Whatever it is that you would use the money for, starting early will give you more flexibility and comfort later.

There are two choices with money: it can be spent or it can be put to work for you. If you put it to work for you it can go towards your future freedom and flexibility, whereas if you spend it you will need to work more to earn it back again.

So the question is: What do you want in life?

If it’s maximising your savings to give you added control and flexibility to spend more time with family when you retire, or take a well-deserved break, then getting on the right track begins with knowing how your money is doing.

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