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Planning your finances and budgeting

Things you might want to consider when managing your finances, budgeting and planning for a better future.

We've outlined key things you need to consider when planning and taking control of your finances. 

If you have any questions, please call our friendly team on 03300 244612

Taking control of your finances

It's important to choose the right way to save and manage your money.

Building Society or Bank account?

There are different types of current accounts available and all have their pros and cons, making the choice of what suits you confusing at best. 

“Best buy” tables in the financial pages of newspapers and magazines can be a guide but tend to focus on the benefits of being in credit. Remember that the account you choose has to be right for the way you intend to manage your account.

Individual Savings Accounts?

A Individual Savings Account (ISA) is a tax-efficient account that allow you to save up to a certain amount each year. 

Each tax year, you get an ISA allowance which sets the maximum you can save within the tax-free wrapper from April to April. For the current tax year this is £20,000.

With an ISA you can invest up to the limit in cash, or in stocks and shares, and you can switch your savings between the two should you choose. So, if you did decide to invest the maximum amount, you could divide the money between your cash ISA and your stocks and shares ISA. 

The tax efficiency of ISAs is based on current rules, and the current tax situation may not be maintained. The benefit of the tax treatment depends on individual circumstances.

Credit cards?

A credit card used wisely can help you with cash flow and take advantage of the interest-free payment window. 

However, if you don’t repay your bill in full each month it can be a very expensive form of borrowing. Remember too that forgetting to make a payment, or just paying the minimum amount each month, can have a negative impact on your credit score.

Equally, transferring an existing balance on to a 0% interest card can be a good idea for some. If there is still a balance at the end of the free period, you could of course look to transfer the balance to a new card with another 0% balance transfer offer.

Understanding interest rates

If you overspend and incur an overdraft, for example, you will incur interest charges, especially if you have not cleared this in advance with your bank or building society.

Nowadays regulations ensure the full cost of borrowing or going overdrawn is fully explained beforehand. For savers, the law also requires banks to quote the rate if you held the product for a whole year.

With a loan this is called the APR, the “annual percentage rate”.

For savings it is called the AER, the “annual equivalent rate”.

If you do decide to take out a loan it is important to consider other features, such as how much the repayments cost every month and the length of the loan.

With savings, you may want the option to withdraw interest monthly or leave it invested to receive a higher level of interest. The APR or AER enables an easy comparison of the loans or savings, so you can see which is the most expensive or cheapest in real terms.

Budgeting and managing your money

Budgeting for everyday essentials such as food, fuel and a roof over your head is relatively easy to plan. More challenging however, is to build up a ‘buffer’ to cope with the unexpected – perhaps the need to replace your car or to survive a period of redundancy.

Whilst putting aside some money for future plans is not an exciting activity, savings give you flexibility to do things when you want to, without impacting on your daily existence or running into debt.

Budgeting is dull but is also common sense. It is never too early to create a credit and debit spreadsheet, where you should list your income and your outgoings, such as food, clothing, car costs, travel, energy bills, and leisure pursuits. The point being that you should organise your finances to make sure your spending never exceeds your income. 

Budget planning

The old fashioned way to budget is to list all of your income on one side of a piece of paper and outgoings on the other. If you put this into a simple spreadsheet this will work out the figures for you as you go along. 

Nowadays there’s plenty of personal finance software available on the internet and budgeting apps you can download. Some, usually those with a cost attached will “sync” the data across different compatible devices so that you can update the information wherever you are or between different users.

You can also use the calculator on the Money Helper website.

Making you budget work for you

Using a budget planner allows you to prioritise your spending. 

Rather than just spending first and then reconciling your incomings and outgoings, a budget planner enables you to see whether you can indeed afford a planned holiday or replace a household appliance. 

A good budgeting plan, therefore, means moving money from one side of the balance sheet to the other, ideally reducing outgoings to make saving easier.

And remember to not put off a pension

Whilst saving for your retirement always seems such a long way off, you should, if and when you can, start putting as much as possible aside for your retirement. 

Of course, money saved in a pension plan is tied up and for most people, cannot be accessed until the age of 55 (rising to the age of 57 by 2028).

Your future financial security is just as important as your current situation, and the earlier you start saving the more time your pension will have to grow. A good pension income will give you much more choice about how you spend your retirement. 

See the Pensions Advisory Service website for further details.

If you have any questions about what you've read, please call our friendly team on 03300 244612.

Use our savings calculator

Not sure of the best way to save? Try our savings calculator to work out how long it'll take to reach your savings goal.