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Get your finances into shape

Get your finances into shape

Want to get your finances fit? Follow our plan to build up your reserves and shed unwanted pounds on bills.

Anelda Knoesen
From the Money team
15
minute read
posted 15 MAY 2020

Get your finances into shape

It’s not always easy to find the time to take a good look at your money. But, like putting the effort into going to the gym or running to get fit, applying the same mindset to improving your finances can result in reduced outgoings and growing savings. Your financial prospects will get fitter, your bills will be leaner, and you’ll be stronger overall.

Start with budgeting

Understanding your income and your outgoings is the equivalent of knowing your weight, heart rate and BMI when trying to get fitter. It gives you a baseline to see where you stand and to help you decide where you can make improvements.

Doing a budget can be helpful, too, if you’re facing short-term financial issues – for example, if you’re going on maternity leave, saving for a wedding or have your hours cut at work temporarily. A budget can help you plan how to bridge any shortfall in the best way for you.

Budgeting: income and expenditure

A good way to start is by getting together a couple of months of bank statements or checking your banking app.

You might also find that AutoSergei can help you keep an eye on your bills and what you’re paying out. This free service works by linking your bank accounts and credit card accounts in your Meerkat app so you can:

  • See all your accounts in one place – no need to log in to different banking apps.
  • View regular payments and bills.
  • Have all your regular bills split into categories, from breakdown cover to entertainment, so you can see the types of things you spend your money on.
  • See whether your bills have increased since the last payment, so you can spot savings opportunities.
  • Compare providers with us to see if you can save - from car insurance to energy to broadband.

If you use cash it might be worth keeping receipts or making notes for a week or so on where your money goes, as bank statements won’t help here.

To work out your budget, use a budgeting tool, spreadsheet or just make notes. Start with your income, including everything from wages, benefits, savings interest and maintenance payments, to see exactly how much you have coming in.

Then check what your outgoings are. It’s helpful to group outgoings together under different types, for example:

  • Mortgage/rent
  • Utility bills – gas, phone, electric, broadband, mobile
  • Loans and credit – eg car payments, credit cards
  • Insurance payments
  • Regular savings
  • Subscriptions – eg gym, magazines
  • Childcare costs, babysitting, pocket money, activities
  • Living costs, such as grocery shopping, lunch costs
  • Travel costs – work and car
  • Eating out and takeaways
  • Clothes
  • Health and beauty – eg hairdresser, prescriptions, dentist
  • Leisure – cinema, days out, books, games, films, sport and hobbies, drinks, lottery, holidays

Grouping things together will help you understand where you spend the most. Writing it down is useful as it’s easy to forget buying the odd thing here or there, which can add up over time.

Using your budget to improve your financial position

Once you’ve worked out your income and expenditure, you’ll be able to see if you have a shortfall - where your outgoings are more than your income. You can then take action to avoid getting further into debt. If you have a surplus, you might want to make sure you’re making the most of this money by putting it into a savings account. Some bank accounts or apps can help by sweeping any surplus into savings. Or set a reminder to do this at the end of each month.

There’s a few areas to look at if you’re trying to reduce your outgoings.

Household bills
Your budget will give you some idea of how much your bills are currently costing you, offering you the chance to save money without having to forgo anything.

We can help you see if you can save money. With AutoSergei, you can identify all of your regular bills and see where you could make savings.

If AutoSergei picks up that you could potentially save on your energy costs, all you’ll need to do to see if you can save is find a couple of recent energy bills and start a quote. For example, when it comes to gas and electricity, 50% of people could save £345 a year on their dual fuel energy costs**. And 30% people could achieve a saving of £516 – or £43 a month***.

**Where a saving can be achieved, 50% of people could achieve a saving of £345 on their dual fuel energy costs, based on Compare the Market data in February 2020.

***Where a saving can be achieved, 30% of people could achieve a saving of £516 (or £43 per month) on their dual fuel energy costs, based on Compare the Market data in February 2020.

So, the few minutes it takes to complete an energy quote could potentially save you hundreds of pounds. And energy providers guarantee to maintain your gas and electric supplies while you switch, so you don’t need to worry about getting cut off.

Then just imagine the savings adding up, if you can also find a cheaper broadband, TV, or mobile deal.

Mortgages
If you have a fixed-rate mortgage and you’re coming to the end of the term, it could be time to see if you can get a more competitive mortgage rate. At the end of any fixed-rate deal that’s been agreed, your mortgage rate will switch back to the provider’s normal interest rate - known as the standard variable rate (SVR) - which can be much higher.

According to the latest Bank of England data, the difference between the average SVR and two-year fixed rate is 2.78%. This could mean a saving of hundreds of pounds for many homeowners based on typical mortgage debt of over £135,000, a saving that’s likely to far exceed any fees charged by the provider.

  SVR Two-year fix
Average rate 4.26%
(BoE data, Feb 2020)
1.48%
(BoE data, Feb 2020)
Approx monthly repayments £669 £467
Total monthly saving:   £202

You can compare mortgage deals with us. Or talk to our partners at London & Country Mortgages Ltd^^ for fee-free mortgage advice.

If your budget shows that you have some money left over at the end of the month, it could be worth considering whether to overpay your mortgage. Many mortgages will let you overpay to a certain level without any penalty. This could mean that you would be mortgage-free earlier and pay less overall by the time your mortgage is paid off.

^^London & Country Mortgages Ltd (L&C) are a multi-award winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (143002).
L&C are not part of Compare the Market Limited. Compare the Market may receive an introducer's fee from L&C, for customers who use this service. All applications are subject to lending and eligibility criteria.

Insurance
Finding a better deal on your insurance, rather than letting your policies renew automatically, can give you big savings. For example, 50% of customers could save up to £282 on their car insurance when they get a quote with us^^^. And we might be able to help you save on home insurance too.

^^^Based on Online independent research by Consumer Intelligence during February 2020, 50% of customers could achieve this saving with Compare the Market motor insurance.

Luckily, AutoSergei can do all the legwork for you, automatically checking for better deals before you need to renew.

General spending
When things are tight, budgeting can also highlight areas where you might be able to cut back – like buying fewer takeaways and coffees, or sticking to your shopping list in the supermarket and not adding impulse buys.

Try giving yourself a set amount each month that works within your budget and stop spending when you’ve used up this allowance.

Finding a better deal on borrowing

If you need to borrow money, for example for boiler, car or home repairs, there are several options available, including overdrafts, loans and credit cards. You should never borrow more than you can afford to pay back. Rates of interest on loans can vary enormously and as a rule of thumb the lower the interest rate the cheaper it is to borrow. But you must also remember to take account of any charges too.

Make sure you choose the right option for you, based on:

  • how much you need to borrow
  • how long you need to borrow for
  • the interest rate charged for borrowing and any fees
  • how much you can afford to pay back every month
  • what your credit rating is.

It’s worth knowing that:

  • Some overdrafts offer a fee-free buffer of a few hundred pounds. Make sure you check, though, as some providers may charge you up to 40% interest on an overdraft.
  • You usually can’t borrow less than £1,000 for a personal loan, although a few lenders may offer loans from £500.
  • If you borrow cash on a credit card, you’ll pay interest straight away; with purchases, you get an interest-free period.
  • If you choose a loan secured against your home, you could lose your home if you don’t keep up with your payments, as your lender could repossess your property to get their money back.
  • Applying for credit will be added to your credit rating records. If you make too many applications at the same time to see which you’ll get accepted for, this can worry lenders. It can be helpful instead to use an eligibility tool to see what you’re likely to be accepted for.

In March, the Bank of England reduced base rates to an all-time low, making credit potentially cheaper than ever. If you already have a credit card or loan, it might be worth exploring to see if you can find a better deal.

Credit cards
Credit card interest rates can be much higher than those of loans. If you already have a credit card, check your statement to see what you’re paying – you may be able to find a better deal. Remember, the lower the rate of interest, the better for you.

Choosing a credit card
The type of card you choose depends on your situation and the way you want to use your card. There are different kinds of cards designed to be used in particular ways, so choose the one that’s most appropriate for you.

0% balance transfer cards
For example, if you want to reduce your monthly outgoings and pay down a card to reduce your debt, a 0% balance transfer card might help. You’ll be given a set period of time where you won’t have to pay interest on what is owed, allowing everything you pay to be used to reduce your debt.

0% purchase cards
If you’re planning on making a large purchase, for example, new kitchen appliances or a new sofa, a 0% interest on new purchases card might help you spread the cost, especially as store credit can be expensive.

Reward cards
If you always pay off your card every month, you might look to get more value with a card that offers rewards, such as cashback, points or airmiles.

Credit building cards
People with no history of responsible borrowing might be able to get a card specifically designed for this situation. Credit building cards usually have fairly low borrowing limits and higher rates of interest. But they’re a good way to show that you can borrow and pay back according to the rules. For example, if one of your long-term financial goals is to buy a home and you don’t have a credit record, a card can help you demonstrate that you can manage your money effectively. You should only consider getting a card if you know that you can pay back in full, straightaway, whatever you spend on your card.

Credit building cards can be helpful for people who have had financial problems in the past to demonstrate they’re now back on track.

But in any case, if you’re not in a position to pay back then you shouldn’t consider taking on any debt by getting a card.

To find out which cards you could be accepted for – or to see if you’re likely to be accepted for a card with a more competitive interest rate – use our credit card eligibility checker.

Loans
When deciding on a loan, you’ll need to weigh up how much you can afford to pay back every month against the overall cost of the loan. From the table, you can see that the longer you have to pay off the loan the cheaper the monthly payment, but the higher the overall cost. You can also see the impact of a higher interest rate on the cost of the loan.

Loan amount Interest rate Loan term Monthly payment Total payment Total interest
£10,000 5% 3 £299.21 £10,771.58 £771.58
£10,000 10% 3 £320.65 £11,543.47 £1,543.47
£10,000 5% 5 £188.20 £11,292.24 £1,292.24
£10,000 10% 5 £210.36 £12,621.35 £2,621.35
£10,000 5% 7 £140.82 £11.828.70 £1,828.70
£10,000 10% 7 £163.79 £12,758.63 £3,758.63

Some loans will charge you a penalty if you pay back early, while others may let you overpay up to a set level, so make sure you understand any conditions before you take out a loan.

If you have a poor credit rating, you may be offered much higher rates of interest. Find loans you’re most likely to be accepted for, without impacting your credit score – use our eligibility checker.

Debt consolidation loans
If you have a number of loans and credit cards, you might find that you can reduce your monthly debt payments by getting a debt consolidation loan. This brings all your debts together and also means you will only have to make one payment a month.

This can help you plan and budget better and could free up money to allow you to pay some of your bills. You’ll need to carefully weigh up the benefits, though, as there may be fees to pay with this type of loan.

But remember, debt consolidation loans can have higher interest rates which means that you might have to pay more in total over the entire term of the loan. If you opt for a longer loan to get lower monthly payments this will also mean that you are likely to pay more overall.

If you’re facing debt issues and you don’t see how you can resolve them, there is free help available. See more from the Money Advice Service on getting advice if you’re struggling with debt.

Overdrafts

Depending on who you bank with and what type of account you have, you might have a buffer where your bank lets you go overdrawn up to a certain level without charging you any interest. You’ll need to check with your bank to see if this is an option available to you.

Recently, banks have been changing the way they calculate overdraft costs. They’re now allowed to charge up to a maximum of 40% interest for both arranged and unarranged overdrafts. Some banks put off increasing their overdraft rates during the coronavirus pandemic. But customers may be charged these new rates in time.

If your bank hasn’t yet implemented the new level of charges and you’ve built up an overdraft, keep a watch on when the rates will be introduced so that you’re not suddenly hit by large overdraft charges every month, potentially worsening your financial position. If you know this might be a problem, talk to your bank in advance of the charge to see how else they might be able to help you.

Overdrafts are useful for a short-term shortfall. If you go overdrawn regularly or you know you’ll be unable to quickly repay an overdraft, you may find that another way of borrowing has a lower interest rate. Ideally, your budget should help you cut back so that you can bring your account into credit as quickly as possible.

Savings

As the coronavirus outbreak shows, you never know what’s around the corner. Ideally, when you get your finances into shape, you’ll put in place a plan to protect yourself and your household should your situation change.

Financial advisers generally recommend that everyone has an emergency fund of three to six months of easily accessible savings to help them through financial shocks.

Even if money is tight, you can start by saving a small amount every month. Many banks will offer higher rates of interest for regular savings accounts but you usually have to have your current account with them.

If you already have savings, then make sure they’re working as hard as possible for you. Many providers have lowered interest rates, so check to see what your provider is offering and whether you can get a higher rate elsewhere.

If your savings have really built up, it’s worth double-checking that they haven’t gone over the amount you’re guaranteed to get back under the Financial Services Compensation Scheme. See more on keeping your savings safe.

On the other hand, if you’re facing financial problems and you need to get your hands on your savings, you may find you face a penalty if you want to withdraw money from a fixed-term account. In this situation, it’s worth asking your bank if they’ll give you penalty-free access to help you avoid making your financial situation worse.

Your pension
If your budget has shown that you have money to spare at the end of the month, it could be worth considering whether to pay more into your pension. We don’t offer advice about pensions, so to help you make the most of your money and protect your future in retirement, take a look at what the Money Advice Service says on pensions.

Anelda Knoesen

From the Money team

Taking stock of your financial situation gives you a good starting point to see where you can start making savings and to put you in a better place financially. This gives you a sound base so you can achieve your goals and ambitions, as well as a more secure financial future.

Frequently asked questions

How often should I review my finances?

You should check your bank statements and credit card statements when they come in. This will help you to keep an eye on what you’re spending. It also means that you’ll spot any fraud on your account very quickly, making it easier to resolve.

Many banks now offer alerts to let you know that you’re getting close to going overdrawn, so it’s worth considering setting up these alerts. It can help you avoid overdraft fees.

Don’t just let insurance auto-renew as you may find that your provider won’t offer its loyal customers the best rates - they may offer more attractive rates to new customers. See if you can get a better deal by being a new customer with a different provider. We can help you find competitive car and home insurance quotes.

Life can be unpredictable, so try to review your budget and your spending every month to check you’re still on track. It also makes sense to review your finances whenever there’s a change in your life, for example, a pay rise could mean you could save more or pay off debt faster. And we all know that household bills can increase, so you’ll need to be sure you can cope with any additional expenses as they arise.

If you plan to make changes in your life – like getting married or changing jobs – it’s also sensible to plan ahead financially. This will help you see where you could stand financially before you make the changes.

It’s also worth getting your finances into shape if you’re considering buying your first home, or plan on remortgaging to make sure your credit rating is as good as possible.

Should I check my credit score?

While you’re doing your financial check, it’s worth checking your credit score to make sure there are no mistakes. There are three main companies that you need to check. See more on credit scores.

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