Ten Top Tips for Budgeting this Christmas and Beyond

With Christmas only 26 days away here are ten tips to help you the biggest spending month of the year. And keep trhem in mind after Christmas and they’ll help you with your money next year as well.

1. Keep an accurate note of how much you spend for one full month. That includes newspapers and magazines, lunches, cups of coffee and drinks in the pub. Only by doing this will you be able to calculate how much your day to day living is costing you.

2. Try to pay as many bills as you can by direct debit every month. Apart from the fact that you might get a discount for paying this way, if you arrange for bills to be dealt with as soon after your salary is paid as possible then you will know how much money you have left for the rest of the month

3. Keep a spreadsheet showing your monthly income and expenditure. Spread as many bills as you can over the year so that you don’t have big bulges in some months when your expenses increase dramatically. Don’t forget to add in the things that you only pay once a year like your TV License or your Car Insurance.

4. If you need to overdraw to cope with extra expenditure at a particular time remember to ask your Bank first. Unauthorised overdraft rates are much higher than authorised ones and you also run the risk of having bills unpaid or direct debits returned, increasing the charges you are likely to have to pay to your bank.

5. If your borrowing requirements are likely to be longer term then a personal loan might be a better option than an overdraft. Shop around before settling on the loan that offers not only the lowest interest rate but also flexible terms should you find that you are able to repay the debt earlier than you originally intended.

6. Don’t rush into buying something just because you want it today. A store might offer you access to a personal loan or its’ own store card but you should go away and check out the price elsewhere, and whether there are better ways of funding your purchase. This is especially true of more expensive items like furniture or cars.

7. If things get tight at anytime remember that you have to prioritise your debts. If you don’t pay your mortgage you could lose your house, if your electricity remains unpaid you may have it cut off. If you can’t afford to pay everything at one time then you need to make a list of the most important debts.

8. Make sure you speak to your creditors if you are not going to pay bills. There is nothing they like less than debt being built up without being informed. It’s not easy but there should be no stigma to owing money and it is really important that you are up front and honest. Go to them and tell them you have a problem, why you have it, and make a proposal to pay what you can when you can.

9. Remember that if your outgoings exceed your incomings you do have a choice. Most people would look at ways to lower outgoings by trying to spend less. But you could, instead, look at ways of increasing your income, whether by looking for a better rate of interest on savings income or asking for a salary increase or more overtime at work.

10. Here’s the most important tip. A budget is not all about telling you to stop spending money. It’s not supposed to be negative. Just the opposite in fact. It’s all about helping you to spend more money effectively and in areas that you want to spend it, rather than wasting it on high interest charges on loans and credit cards and bank charges. Use it as a positive toll to help you control your money rather than allowing your money to control you!

0% is fine if you’re borrowing it, not when you’re saving it.

How much interest are you getting on the money in your bank account?

The average at the moment is under 0.5%. And that’s before tax. If you’re a basic rate tax-payer it will go down to 0.4% and if you pay tax at the 40% rate then you are effectively getting 0.3% on your money! And there are tens of thousands of people who have money in current accounts paying absolutely no interest at all!

Not very good when you consider that inflation last month according to the Bank of England was 3.1%. So you are losing money! If you invest £100 today then in one year’s time you will have £100 plus a few pennies, but it will only be worth around £97 in today’s money!

And it still seems to be the case that banks often have accounts that pay higher rates of interest than the one your money is in but they just don’t bother telling you. In fact a recent reportreckons that it’s costing us around £12bn in lost interest each year because we don’t look for a better deal when we could easily do so with just a little bit of research.

There are plenty of sites out there with great comparison pages showing where you can put your money for a higher rate of interest. Try www.moneysupermarket.com or www.moneyfacts.co.uk and see how much more you could be making on your money. Don’t be apathetic any longer!

You are entitled to every last penny

I suggested in an earlier piece that ‘pensions’ were the Devil of personal finance. Well I was wrong. Pensions are the Devil’s Apprentice. The Devil is in the annuity! An annuity is defined in the Oxford Dictionary as ‘an investment of money entitling an investor to a series of annual lump sums’!

What does that really mean? Well let’s say you’ve been investing in a personal pension for a number of years and you’ve built up a fund of £100,000.  When you ‘buy an annuity’ with that money you give your cash to an insurance company and in return they will provide you with an income for the rest of your life – or for a guaranteed minimum number of years which means that your spouse or children will continue to get your income if you’re unfortunate enough to die the next month! 

Now you might have been reading that ‘annuity rates are at an all time low’ at the moment. There are a number of reasons for that – partly it’s because we’re living longer and partly it’s because the markets in which annuity money is invested have been a bit unstable recently – but the net result is that your pension fund will produce less per pound now than at any time in the recent past – although that may have changed by the time you read this since the rates are fluid and change on a day to day basis.

And that’s why it’s important if you are about to buy an annuity that you understand the benefits of the ‘open market option’.

Somewhere in the literature you receive from your insurance company you will read these three words. They won’t be in large print and they won’t be prominent because what they mean is that you can hawk your fund round the market to and sell it the company that offers you the biggest income.

So make sure you do! Don’t just take what you are offered. There may well be better deals out there and it’s worth spending the time trying to find them.

As an alternative to buying an annuity you may want to continue investing your pension and to take an income from it. This is known as ‘income drawdown’ or more properly ‘unsecured income’ and new rules coming into force soon might make this a more attractive option for thousands of you as you approach retirement.

We’ll cover this in more detail, and compare options, later.

Are you still gambling with your pension?

I know that newspaper headlines are meant to attract attention, and entice readers to the article they appear above, but that doesn’t mean they should be misleading.

And one of the most annoying headlines in recent weeks is the one that screams out ‘Everyone with a personal pension is losing money as stock markets crash’.

Because it’s simply not true.

Lots of people with money in a personal pension are still making money as markets fluctuate wildly largely because they are not invested in the market! It could be that they have invested in commercial property that may or may not be rising or falling.

But it could also be that they have some or all of their pension fund held on deposit, and picking up a positive, although no doubt modest, rate of interest.

Some pension companies will do this automatically as you approach retirement but you should check with your pension company now and find out where your funds are invested.

Of course you need to be careful when you move out on the market and into cash. If you do this at a low point in the market then you won’t benefit from any large gains if the market rises suddenly.

If you’re not averse to a bit of risk, or still have a way to go before you’re likely to need your pension fund, then you might be better doing nothing for the moment.

But if you’re getting close to retirement, or you’re just uncomfortable with the wild swings we’re seeing in the market today, then cash might be a better option for you.

But the other important message that comes out of this is that lots of people have no idea where their pension funds are being invested.

Take the time to find out what’s happening to it!

Remember – it’s your money. You need to take control of it.

What’s the risk?

Our newspapers and TV News programmes have been full of reports of ‘tumbling stock markets’ in the last few weeks. But what is the risk involved when you invest in the Stockmarket? Can you really lose everything? And what’s the difference between ‘investing’ and ‘gambling’?

Over the next few weeks we’re going to be looking at ‘risk’ on Moneysucks? Everything from ‘under the pillow’ to the 2.30pm at Newmarket!

To kick us off Alasdair Ronald, Divisional Director at Stockbroker Brewin Dolphin, gives us an idea of what he means by ‘risk’.

“All forms of investment have some risk –and each individual needs to be clear on the level of risk they are willing to accept and also be aware of what the risks are.

If money is held in a deposit account perhaps the two biggest risks are that inflation can erode the real value of the funds and also the bank or building society might get into financial difficulties – Northern Rock and the Icelandic banks are just two recent examples. However with some justification, funds on deposit are normally regarded as relatively low risk.

Why would anyone want to increase their risk? The simple answer is to obtain a better return. The Icelandic banks were offering a higher rate of interest than the UK and this attracted many depositors, some of whom would not have been aware of the increased risk.

Many people have a pension and most pension funds invest in a range of assets, all with different risk profiles. It is likely that there will be some UK government debt, which is usually considered fairly safe, with both the interest payments and capital guaranteed by the government. A default is unlikely but, as recent events in the Eurozone have shown, it is not impossible.

To enhance the prospects of superior returns, most pension funds will also have some exposure to commercial property and equities (ordinary shares), both of which have outperformed deposits and government debt over the longer term. Both provide some protection from inflation as rents and dividends can be expected to increase over time. However, rents and dividends can fall as well as rise, and capital values will inevitably fluctuate.

Risk can be reduced by ensuring there is an appropriate level of diversification – you should never forget the maxim that it is not sensible to have all your eggs in the one basket. For individuals this might be as straightforward as spreading money around different financial institutions if the total is greater than the £85,000 deposit guarantee limit, or ensuring that any exposure to equities is well spread over a number of companies. A limited number of holdings (whether they be “free shares” when building societies demutualised, privatisations, or shares in the company for which you work) increases the risk unnecessarily and one should never assume that any share is only going to increase in value over the longer term.

In summary, when making any investment you should be clear on the level of risk and think about the impact on you in the worst case scenario.”

Let us know what you think, and how much risk you would

Are pensions too tough for Einstein?

Lord McFall commented in the recent Workplace Retirement Income Commission report that ‘millions are left in a pensions minefield that would puzzle Einstein.’ Well this morning Moneysucks creator Fergus Muirhead appeared with Lord McFall on the Call Kaye programme on BBC Radio Scotland to discuss pensions and to answer questions put by worreid listeners. If you missed it you can catch up with it for the next seven days here

Who benefits from low interest rates?

With the Bank of England Base Rate sitting at 0.5% for the 28th month in a row you would think that most people would be happy.

But not so. The Save our Savers Group (www.SaveOurSavers.co.uk) has just written to all of the members of the Bank’s Monetary Policy Committee asking them to raise rates to help savers.

While borrowers, particularly those of us with mortgages, have benefitted greatly from the Bank’s decision to hold rates low for nearly two-and-a-half years**, savings have been decimated, with pensioners particularly hard hit. Some estimates say that a combination of inflation and low interest rates has reduced the value of our savings by £50bn in the last year alone.

Although there are some reasonable rates of interest on some deposit accounts they are few and far between and often only available for short periods of time, to an institution’s existing investors, or to those willing to tie their money up for long periods of time.


The alternative is to take more risk with your cash and look for higher returns in equity markets. But of course that comes with a greater degree of risk and, in the current climate, no degree of certainty of a better return.

And of course the second reason in arguing for an increase in interest rates is to help curb inflation, now reckoned to be just under 6% for food. So would you be prepared more to borrow money, for your mortgage as well as your credit cards and loans, if it meant that the price you had to pay for all of the goods you bought to live each day might increase more slowly?

So what would you rather see? Would you be prepared to pay a bit more to borrow money if the flip side was that the rates of interest on your savings were also increased?

Drop us a line or send us a Tweet @money_sucks and let us know what you think.

**There is also a lot of disquiet that while interest rates are at the lowest they have been for decades, Banks haven’t had the decency to reduce the rates they are charging to borrowers by the same amount and some borrowers, particularly those with credit card and store card debit, are still paying way over the odds to borrow. We’ll be coming back to this one next week.

Where next for Pensions?

As the Govenrnment announces another shake-up to the State Pension system we have to ask when it’s all going to settle down? The start of the 2011-12 fiscal year on the 6th April sees big changes to the way investors can take benefits from personal pensions, as well as changes to the amounts that can be invested annually and now it looks as though there may be major changes to the way State Pensions are paid too.

There has been talk of changes to the ages at which both men and women can start to take their State Pensions ever since the new Government came into power last year. And now we hear that changes are to be made to the bedrock of the State system – the Basic State Pension.

Currrently the Basic State Pension will pay £97.65 but this can be increased to £132.60 by the addition of the means-tested pension credit. On top of this figure many pensioners are entitled to benefits from the Second State Pension dependent on National Insurance contributions if they have been opted-in, or investment performance of a separate fund if they have chosen to opt-out. One of the new proposals in that the Second State Pension will disappear, perhpas meaning an increase in National Insurance contributions for those employees who are currently contracted-out.

To replace the Basic State Pension and the Pension Credit might be a flat payment of around £155 per week, but not payable until you have reached 66 – although this age may well change again between now and the proposals becoming law.

As the proposals currently stand only new pensioners who qualify for benfits after the changes come into force will benefit. Existing pensioners will continue to be paid under the existing system.

There is no question that the current system has flaws and is unnecessarily complicated – it is estimated that around one-and-a-half million people are entitled to some form of Pensiion Credit but have so far not claimed because of the complexity of the process – but it remains to be seen whether the faster than anticipated rise in the state pension age for women under the new proposals will dampen the enthusiasm in some who would otherwise have been more supportive of the changes.

I’m 18. Should I have a pension?

Q. I am currently an undergraduate student and 18 years old and have numerous savings. I currently have a part time job while studying at university. Although you may not be permitted to give advice on this sort of thing do you think it would be, in the current economic climate and uncertainty about the jobs market, be worthwhile opening up a pension now so that at least I have something started when I leave university? Something like a stakeholder pension only requires at least a £20 investment per month. Please give me your thoughts on this matter- its just we are all told to start early!

Jack Fraser

A. It’s a really good question Jack and I’ve just read an article in one of today’s papers telling me that more than 25% of people are going to retire with nothing but the State Pension to live on, so the fact that you are starting to think about making some sort of pension provision so young is great. As you rightly say you can start to invest into a Stakeholder Pension with as little as £20 per month and that will be increased when it is invested since your pension company will reclaim basic rate tax on each £20 you invest.

The benefit of starting to invest in a pension now is that you will be saving (at least under current legislation) until you are at least 55 which means that your money has at least 37 years to grow, and it will grow in a fund that is, at the moment at least, mostly tax free. So the pluses of investing in a pension at the moment are that you should benefit from long term growth (although the market is fairly fluid at the moment and you may see some short term losses if you invest in particularly adventurous funds) and that you will receive tax relief on any investments you are making.

The downside is that you will not be able to access your cash until you are at least 55 – or maybe older if legislation changes between now and then – and you will not be able to have all of your cash back as a lump sum. Currently you will be able to take up to 25% as a tax free cash sum with the balance being taken as income.

Of course when you start work you may find that your employer offers a pension scheme at which point you may want to move the Stakeholder Scheme you are thinking of setting up now into your employer’s Scheme partly to make it easier to administer going forward and partly because it might be easier to manage the investment strategy you adopt via one plan rather than two.

It is also the case that stakeholder pensions are flexible enough these days that you can change the level of investment that you make to cope with your own circumstances so that if you need to stop investing for a while because you are not working then you can take a break from your pension and pick it back up again when you start to work.

The amount of money you can invest is dependent on your income on a year by year basis so you will have the flexibility to increase or decrease as your income changes.

I haven’t talked about the way you invest your money once it is in the pension here so will come back and address this issue in a separate post.

How much more flexible will your pension be now?

New rules coming into effect next year should mean that many savers will be able to  continue to access their pension fund after age 75 without resorting to the purchase of an annuity. This is great news for those who have long seen the need to purchase an annuity at 75 as an unnecessarily restrictive rule that impacted the ability to use pensions as an effective savings vehicle for retirement.

Pensions have long been tax efficient and under current rules savers are able to take 25% of their personal pension fund as a tax-free lump sum and then use the balance invested in the fund to provide an income as long as they buy an annuity by age 75.

The new rules will allow the income to continue beyond your 75^th birthday without the need to sell the remaining fund to purchase an annuity.

On top of that the government has said that you can take as much as you want out of your remaining fund, whenever you want it – provided that you can confirm an income of at least £20,000 per annum from other ‘secure’ sources. These sources will include the State Pension, any Occupational Pension and income from existing annuities.

On death any money still left in your fund can either be used to provide an income for your dependents or taken as a lump sum, but with a tax charge of 55% deducted.  

For those looking to take advantage of the new ‘take what you like out of your fund’ rules it might be more difficult than it seems. Experts reckon that you might need a fund of around £200,000 to provide this minimum level of £20,000 a year, after taking the State Pension into consideration. The number of savers estimated to be likely to have this sort of fund at retirement is said to be around 50,000, so the new rules may have less mass appeal than was first thought.

While the changes are generally good news and will help to make pensions more appealing for more investors the need to document a fairly high level of income before the real flexibility kicks in will limit the universal appeal of the changes. For investors who are unlikely to be able to build up the levels of pension fund needed to take advantage of the rules it will still be vital to have a close look at where else you are savings. This is even more important given the latest inflation figures out and the small number of savings accounts that actually provide returns in excess of inflation even for basic rate taxpayers.

Of course it is to be hoped that changes like these to pensions will gradually make them more attractive toy a younger generation of savers who will not have access to company pensions and so perhaps in time a greater proportion of those using pensions to save for retirement will benefit from the new rules.

Next Page »