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Slim down your finances By Hannah Ricci
If you've overindulged during the festive season, the chances are that your waistband isn't the only thing feeling a bit tight come January. We'll be starting the New Year with a huge financial hangover worth £4.7 billion, according
However, in addition to splurging on gifts and festivities, many of us have developed bad money habits over the past year too. Research from Clydesdale Bank, for example, found 28% of Brits don't have a savings account; the majority of store card holders don't know the interest rate they are paying, and one-in-three of us admits to frittering £100 away each month on items we don't need.
So, the Moneywise Detox is here to help. Here, we show you how to flush out the financial toxins and explain how small changes here and there can help beef up your bank balance. The B wordThe core foundation of good money management is not anything complex or revolutionary; in fact, it's so simple all you need is a pen and paper: it's called a budget. Whether your aim is to clear debts, save, or simply not be left destitute in the week before payday, learning to budget will transform your finances.
The idea of budgeting is to monitor how much money you have coming in and going out, so that you can work out what you have left for non-essential expenditure.
Now, while this concept is quite simple, many of us find it very hard to maintain a budget because we either set unrealistic goals or don't have the commitment to see it through. It does require some determination and willpower, but it will be worth it when you start to free up more money each month.
The first step is to list all your regular monthly expenses. This will include mortgage or rent, council tax, insurance, utility bills and debt repayments, which can be found by looking at your bank statements.
Now look at the list to identify any direct debits that aren't completely necessary and consider if you could manage without these. In a survey by Abbey around 3.58 million people admitted to having gym membership despite rarely going for a workout, and with membership costing between £40 and £90 a month it's a huge amount to be shelling out in the hope you'll suddenly develop a love for the treadmill.
Now you'll have a remaining figure that you use to finance your day-to-day living. If you take home £1,300 a month after tax, for example, and your fixed expenses amount to £800, you'll have £600 left to spread throughout the month.
The next step is to have another look at your bank statement and list any other expenditure, such as grocery shopping, entertainment, travel and personal shopping. It's worth looking over a few statements to work out your average monthly expenditure because it can vary. This process can be quite enlightening - highlighting areas where you should easily be able to cut back.
If your statement shows lots of £10 and £20 cash machine withdrawals that you cannot account for, this is evidence of frittering away money. On average, we're guilty of wasting £100 each month. We all do it and everyone has different weaknesses - takeaway coffees and lunches, magazines, cigarettes - individually they're not worth much but together they can add up to a substantial amount over a month. This is where keeping a money diary can be useful.
"I advise the use of a diary to record every penny you spend each day for one month," says Philip Pearson, partner at financial planners P&P Invest in Southampton. "This will give a breakdown of exactly how much of your hard-earned income is being used for the essentials and what is being frittered away."
Now comes the crunch of writing a budget: setting your limits. This can be the hard bit to maintain; without guidelines your spending can easily escalate out of control. "Remember saving and meeting the basic costs of living should come before any other expenditure," says Pearson. The key to getting it right is being realistic - there's no point giving yourself a tiny budget if there's no way you'll stick to it.
The next step of the Moneywise Detox is to revisit those fixed expenses that are likely to take up the largest part of your monthly income and see if you can cut down on some of those financial calories to make your bank balance healthier. MortgageEven though interest rates were cut in December, the chances are that your mortgage isn't as healthy as it could be. When your current mortgage deal comes to an end, you will automatically be transferred to your lender's standard variable rate (SVR), which can now be as high as 7.75%. Those who took out fixed-rate mortgages back in 2003 when rates were as low as 4.5% will be the hardest hit when their current deals expire.
Monthly repayments on a £150,000, 5% fixed-rate mortgage for example, would rise by a whopping £256 a month if the borrower was transferred to an SVR of 7.75%. Indeed, research from broker John Charcol, found homeowners could be squandering as much as £369 by delaying remortgaging from their lender's SVR for three months, and £1,500 if they put it off for a year.
The first step is to speak to your current lender to see what it can offer you. At the Nottingham Building Society, for example, borrowers can swap from the SVR of 7.79% to its three-year tracker mortgage at a rate 5.75%, saving £211 a month on a £150,000 mortgage. While your existing lender may offer a competitive rate to keep your custom, it's also worth shopping around.
In addition to rate, it's important to consider mortgage fees, early repayment charges and the flexibility of the product to figure out how much a mortgage will cost over the whole term. All these factors can make it tricky to compare products across different lenders, so it's worth speaking to an independent mortgage broker who can find the best deal for you. UtilitiesEnergy costs increase during the winter, so this time of year offers the perfect excuse to review your tariff. With lots of price rises and subsequent cuts in recent years, it's tricky to know which provider offers the best deal.
According to Paul Schofield, head of utilities at Moneysupermarket.com, it completely depends on the size of your home and how much energy you use. "British Gas Click Energy 4 is the cheapest product on the market for an 'average' house in 13 of Britain's 14 regions, but for people in smaller homes other providers lead the way," he says. "In a London flat, for example, npower SOL8 costs £24 a year more than Scottish Power Online Energy Price Fall, which costs around £405.41 a year. But in a large London home, npower would be £33 cheaper than Scottish Power, at £989.88 a year. If you don't know your typical energy usage, you may well choose a tariff that isn't cheapest for you."
So, the first step it to find out how much energy your household has consumed over the past year. "If you don't have bills going back that far, phone your supplier and ask them," says Paul Schofield.
Once you know your energy consumption, visit one of the many price comparison and switching websites and enter your details to find the cheapest deal for you. Online tariffs are usually cheaper and you can cut costs further by opting for duel fuel packages and paying by direct debit.
According to SimplySwitch.com, based on national average consumption of 20,500 kWh gas and 3,300 kWh electricity, a London household could reduce their energy bills by £133.64 to £739.66 a year with British Gas Click Energy 4 - provided they have never switched before. InsuranceThe insurance industry is incredibly competitive, so it's likely that you can save money by shopping around instead of renewing with your existing insurer.
First, check to see how much your renewal quote is, then carry out a search of the market by using price comparison websites. It's important to look at the comprehensiveness of what is included in each policy, not just the price, so write a check list of the cover you require from each type of insurance to make it easier to compare like for like. This will also ensure you're adequately covered in areas where you need to be, and not paying for anything you don't need.
It's also worth looking at small ways to reduce your premiums. With home and contents insurance, for example, you must state the rebuild cost of your home - many people assume this is the value of the property, but quoting this figure will really up your premium. The rebuild cost should be detailed in the survey carried out when you purchased your home, and is usually around two-thirds of the market value.
Consider whether you really require accidental cover in your policy, as this raises the cost, and whether you are willing to increase your voluntary excess in return for lower premiums. If you haven't already, consider installing burglar and smoke alarms and more secure locks in your property.
Moneywise found that making these alterations on the home and contents of a £350,000 three-bedroom terraced house in north London can knock up to £200 off the price of the policy.
The same goes for motor insurance. The idea is not to cut corners; but to avoid paying for things you don't need. Many things come as standard with car insurance, but consider whether you need legal protection and advice in the event of accident for example, or European cover, or a courtesy car as standard. Many policies also charge more if you opt to pay by direct debit instead of in a lump sum.
Moneywise found that these extras could add up to £300 to a car insurance policy, so it's crucial to distinguish what you do need from what you don't to save money. Phone and internetThe market for communication services is also very competitive so the chances are that once again you could save money by switching providers.
The first step is to review what you require from your phone and broadband to ensure you aren't already paying more than necessary. With broadband, you'll need to identify the speed and download limit you require. There's no point paying for a high usage package, for example, if you only use the internet to send a few emails. If you're unsure what your usage is, you can find out by answering a few questions on switching sites such as simplyswitch.com and uSwitch.com, where you can follow some simple steps to change suppliers.
If you require a medium 2Mb usage package for email, web browsing, and unlimited music and file downloads you could save £144 a year by switching from BT Total Broadband at £24.99 a month to an equivalent deal with Tiscali at £12.99 a month.
Similarly with your home phone, if you call overseas often it's worth opting for a deal that includes this, rather than paying extra each time you make a call abroad. Someone on BT's Option 3 plan, for example, who calls the USA for 120 minutes a month, could save an estimated £144 a year by switching to Talk Talk's Talk 1 plan.
There are a number of good value packages that offer multiple services bundled together, such as home phone, broadband and cable TV, but customer service and reliability can be quite poor. Price and service are equally important with communication services, so it's worth reading customer reviews on switching sites first.
Now your finances have had a thorough detox, you should start to free up more and more money each month. The best place for this extra cash will depend on your financial situation and future plans. Clearing your debts should be your first priority and if you're debt-free, building some healthy savings is your next goal.
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