Tom Selby, senior analyst at investment platform AJ Bell, comments:
“While the rapid rollout of the Coronavirus vaccine brings with it a hope of a return to ‘normal’ life and a possible economic recovery, the short-term picture remains grim.
“The latest official growth figures showed the economy contracted 2.6% in November, and with national lockdown measures once again in place a second recession in the space of 12 months appears a real possibility.
“Even with the furlough scheme in place until April, such straitened times will inevitably place huge pressure on the pockets of millions of Brits.
“It is therefore more important than ever that people engage with their day-to-day spending and know where savings can be made if necessary.
“Although the temptation may be to stick your head in the sand, there are lots of simple steps you can consider which, when added together, could make a real difference to your financial position.”
1. Prioritise paying off high-cost debt
“If you have spare cash it might be wise to use it to pay down any expensive debt you have, such as credit cards or loans. If you’ve got lots of borrowing in different places, find the debt with the highest interest rate and start paying that off first, before moving to the next highest rate. Moving this burden off your finances could really help if your income is cut or you lose your job.
“However, many people won’t be in a position where they have spare cash to be able to funnel into paying off debt. If that’s the case your focus should be on reducing the cost of any debt.
“There are a number of different schemes in place if you’ve been affected by the pandemic, including getting a payment holiday from your bank. If you go down this route, make sure it’s definitely the right decision for you as it may cost you more in the long term.
“Otherwise look to shift your debt to a cheaper rate. Those with better credit records will find they have more options open to them, but moving your debt to a 0% credit card or a personal loan on a cheaper interest rate could be a good option, and means you can use more of your capital to pay down the actual debt each month rather than just paying off the interest.”
2. Get a cash buffer in place
“Once you’ve dealt with high-cost debts, your next step should be to build up an emergency pot of cash that you can fall back on should you lose your job, face an income cut or are hit by any unexpected costs.
“The first wave of the pandemic revealed just how exposed millions of people are to financial shocks. In fact, one-in-eight adults have no savings at all, while 45% of the population have less than £2,000 in cash saved for a rainy day.
“It’s a good idea to build up at least three to six months’ essential outgoings, so add up your mortgage or rent, bills, food shopping and any other essentials and work out how much you need. If this seems unachievable then just put away what you can
“Crucially, this money should be available immediately, even though that’s not going to earn you much interest at the moment. Put it in the highest interest easy-access cash account you can find, rather than one where access to the money is restricted – at the moment this will pay 0.6% according to Moneyfacts*.”
3. Get on top of your ‘life admin’
“Doing the ‘life admin’ of going through your bills and getting cheaper deals can seem boring, but it’s much less time consuming than you might expect and can save you a huge amount.
“Your mortgage is where you’ll find the biggest savings, because the level of borrowing is usually so much higher. As a rule of thumb, if you’re on your lender’s Standard Variable Rate then you can probably get a cheaper deal.
“It obviously depends if your circumstances have changed since you last got a mortgage as to whether it’s feasible to switch, but at least do some internet searching or speak to an adviser to see if it’s possible.
“Once you’ve tackled that big outgoing, look at bills that might have crept up since you last checked.
“Whether it’s switching to a cheaper energy deal, realising that your Sky package has shot up in price or cutting the cost of your car insurance, there’s plenty you can do just by going on a comparison website and hunting for a new deal.”
4. Signed up for a freebie? Make sure it isn’t costing you a fortune
“People are often lured into a product by a free trial and then forget to cancel it, leaving them lumbered with a monthly bill for a service they aren’t using.
“Amazon Prime is one of the worst offenders but there are subscriptions for all manner of things now, from beauty boxes to pet food to razors.
“Take the time to go through your bank statements and see what you’re paying for. Once you’ve drawn up a list of these outgoings, work out whether you’re getting value-for-money and still using the service – if you aren’t, cancel it.”
5. Dial down your non-essential spending
“Aside from your regular bills, now is a good time to look at what you spend each month on ‘non-essentials’.
“Clearly during lockdown lots of us are spending less on going out and more online, but it’s worth combing over your outgoings and seeing exactly where your money is going each month.
“As people gradually earn more they tend to spend more on their everyday lives, whether that’s buying slightly nicer clothes, going on more expensive holidays or eating out at fancier restaurants. Some of these things aren’t possible during lockdown, but some still are.
“It’s so small that we often don’t notice it, hence the term ‘lifestyle creep’. There’s nothing wrong with this as long as you’re living within your means, but it’s a good idea to pinpoint areas where you can easily cut back and save money, should you need to.”
6. Sort your savings
“Lots of people who have been fortunate enough to keep their job and income in the current crisis have been saving money each month. Whether it’s not paying for childcare, ditching the commute or just going out less, some people have been able to stash a decent amount of cash away.
In fact, the savings ratio hit a record 29% as a result of the first lockdown in 2020. If you’re in this position, it’s important to make sure your money is earning as much interest as possible.
“The record low Bank of England base rate and high demand for savings accounts means you’re not going to get loads of interest on your money, but far too much is sitting in current accounts earning nothing or old savings accounts paying a pittance.
“The top easy-access cash rate at the moment is 0.6%*. You’ll only get slightly more, at 0.85%*, in the top-paying notice account. However, you’’ need to let ICICI know 95 days before you want to access your money, so that likely won’t be worth it for many people.
“Alternatively, if you’ve already got enough cash and your emergency fund is sorted, think about investing some of it for a potentially higher return. Just be sure that you aren’t likely to need access to it for five years or so and be comfortable with any risk you take.”
*Source: Moneyfacts - https://moneyfacts.co.uk/savings-accounts/
