Six of the best New Year Financial Resolutions for us all
It is that time of year when we all make resolutions to make us better people who live longer, healthier lives. Of course most resolutions are broken soon but each year we try again. But what about financial resolutions to improve our financial health? Here are a few to consider.
- Pay off debt. Start with the most expensive debts and work your way down. Even repaying your mortgage early can be a big winner now that interest rates are rising. If you repay an extra £100 of capital on a mortgage when you are paying interest at 4%, you save £4. Were you to invest that £100 in another asset, you would pay tax on that – so a higher rate taxpayer stiffed with a 45% bill would need to earn £6.15 to generate an after-tax return of £4. Getting such a return on a traditional investment implies some capital risk, whereas paying off your mortgage early involves no capital risk.
- Make sure you use all available tax breaks while you can, especially with the growing threat of a Labour-led Government which may end them. So ensure you use your full ISA allowance to get a tax free wrapper on a portion of your wealth each year. Then if you have surplus cash make sure you make your maximum pension contributions. Comrade Corbyn is almost certain to tighten the tax breaks on pensions.
- Ensure you have a reserve of ready cash. At the very least you should always have three months’ pre-tax income at hand in case you lose you regular source of income. Ideally, if you invest in shares, build a far bigger position.
- Accept it, we are in a bear market for shares. So, as we have noted before on these pages, ensure you have a decent cash weighting in your portfolio – at least 20%, arguably more, because at some stage there will be real bargains for the long-term investor. But…
- Do not rush to “Buy the F*cking Dips” BTFD – that is bull market logic. In a bear market that strategy can become catching a falling knife.
- Consider selling every share you own even if it means taking losses. Don’t do it of course, but ask yourself: based on what you know about the company now and given the uncertain macro-outlook, and the very real difficulty loss making companies will have raising fresh equity, would you buy it today at the current share price? If the answer is “no” then you should sell and invest in something that really is cheap. In short, don’t wait until Spring for a Spring Clean of your portfolio.
Best wishes from the UK Investor Show Team for a prosperous 2019.