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17 hours ago
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The past few years have taught us that it’s pretty hard to guess what financial shocks are around the corner, so all of this is written with the caveat that 2025 might not go as expected.
But assuming we face a bit of stability, we are looking ahead to a time when prices for groceries, energy, homewares and other daily spending will plateau or maybe even go down. Interest rates are expected to fall too, as the Bank of England stops worrying about inflation and attempts to put a bit of fuel back in the economy. All of this means there are some jobs to do with your finances:
Lock in to good savings rates
You have missed the peaks of the savings market, but may still be able to get a better deal on your deposits than you are now. Putting away your money for a fixed period of time will typically secure you a better interest rate than you will be offered on easy access accounts. Make sure you have enough you can get hold of if you need it in an emergency – a boiler or car breakdown, for example – and then look for a good rate on the rest.
Currently, you will get a better rate on a one-year fixed-rate account than a five-year account, because over the longer period the base rate is expected to fall further. You need to decide whether to take the higher rate and hope that in a year’s time you can get something like the current five-year rate, or whether you think taking a hit now will be worth it over the longer term. If you have enough money to meet the minimum deposits on different accounts, spreading your cash between them is a good way to hedge your bets.
Say, for example, you can get 4.7% on a one-year deal and 4.2% on a five-year deal, in the first year on every £1,000 saved you will earn £47 or £42. At that point when you go to reinvest, if you can still earn 4.2% you will not have lost out overall – you will be earning that rate on £1,047 rather than £1,042 so will be better off. But if rates have gone down to 3.7%, your gain will be wiped out in the first year and if rates stay there or fall further you will be worse off.
There are savings calculators online – including on the Bank of England’s website – which you can use to compare how much you will get.
If you are a taxpayer sure you are using your Isa allowance, and if you don’t want to hold any of it in stocks and shares use it for your cash savings. You can put in up to £20,000 each tax year, so you can put some in now and after 6 April. You will keep all of the interest you earn on it. Interest earned outside an Isa could attract tax. If you are a basic-rate taxpayer you can earn £1,000 in interest before it is taxed; for a 40% taxpayer the figure falls to £500.
Moneyfacts and Savings Champion are good websites to check for the best rates.
Review your pension contributions
The cost of living crisis may have caused you to reduce or even pause your payments into your pension. Some things have fallen in cost, and you may have benefited from a pay rise linked to inflation, so take another look at what you are paying in.
Employees are not automatically enrolled into pensions when they start a new job, and they and their employers have to pay in, but the legal minimum contributions are low – they add to 8% of your earnings – and will not guarantee you a good retirement income. Many have suggested that the minimum should be increased to 12%, split equally between employers and employees.
You may already pay in more than that, but there could still be room to improve your retirement provisions. The maximum that can go into your pension each year is £60,000 a year or 100% of your earnings, whichever is lower. That includes any contributions from your employer, but not tax-relief or returns on the investments in there, so it’s likely you will have room to pay in more. If you are in a workplace scheme ask about the additional voluntary contribution (AVC) plan – it might even offer to pay extra in for you too.
Like your main pension contributions this extra money will attract tax relief, so initially what you put into your pension will be worth more than if you put it into any other saving or investment.
Take a look at your budget
All kinds of things could have happened to your finances over the past few years. Your mortgage may have shot up in cost or, if you are lucky, you may have paid it off. If you’re a renter, your monthly outlay is likely to have increased. Energy bills have fallen from their peak, but government cost of living payments have ended, so there is less help available to pay them. For all of these reasons and more you may no longer have a clear picture of what is going in and out of your account each month.
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Schedule a morning or afternoon to go through your finances. If you bank online, you will probably have access to tools that help you see what your regular spending is. As well as simply looking at the list of direct debits and standing orders that go out, you can use these to see where your biggest outlays are. At Lloyds and Santander there are Money Manager pages which categorise your spending so you can see where all your cash goes each month. Other major banks offer similar tools – particulaly if you use their apps for your banking.
Otherwise you could also use a standalone app such as Plum or Emma. These both have free versions which allow you to take an overview of your spending – you will need to give them access to data from accounts – and see where you could start to save.
If your income exceeds your outgoings then maybe you want to consider a better-paying savings account for the difference. If it the other way round, you need to consider where you can cut back, or if you need to ask for help.
Shock-proof your finances where you can
Even the most expert experts probably can’t swear hand on heart that they know what the future holds for our finances. Even as the banking crisis, pandemic, or war in Ukraine started, few could predict the ultimate impact on individuals’ cashflow and costs.
Having money always helps, though. So if there is capacity in your budget, start up some regular savings.
You can use things like rounding up to get the ball rolling. This is available on the online bank Monzo, and via apps, including Plum. You set it up so that it rounds up any spending to the nearest £1 and puts the extra in a savings account. If, for example, you spend £1.49, it will put by 51p for you. Options are to set up a regular savings account from your account at the start of the month, so you will get used to not having the money to spend. Or sweeping everything left in your current account at the end of the month into a separate savings account.
Insurance can help too. Some global events can be insured against. You should cover your home and property against flooding, and other disasters. Cover your holiday as soon as you book it – get an annual travel policy and you are insured straight away. Check that you understand what it will cover before you pay.
Life insurance with critical illness cover will mean that if you are die or are diagnosed with a terminal illness there will be some money for your family to use. Income protection insurance will pay out to replace your earnings if you are unable to work.
The better the insurance and the more events it will pay out for, the higher the price is likely to be, but it is still worth shopping around, using a broker or comparison website.
