A more prosperous 2021? – Here’s how!
Samuel Leach, founder and director of Samuel & Co Trading (samuelandcotrading.com) and Yahoo Finance’s number one ‘Trader to follow in 2020’
In addition to the well documented and tragic impact of Coronavirus on people’s lives, 2020 has been one of the most challenging financial years in living memory. Its impact has been felt by everyone from individuals and SMEs to national economies and international corporations.
Follow my helpful tips to avoid pitfalls in 2021, and work towards your long-term financial stability and security.
Step 1 – Debt
Whilst there is such a thing as ‘good’ debt, debt that supports investment, many people who find themselves struggling financially will have ‘bad’ debt. Whether it was a loan to cover a gap in employment or to top up Furlough payments, to pay off a holiday (remember them!), or for some other short-term requirement – PAY IT OFF!
Few investments can guarantee a return that will outperform interest accrued on a debt, so it’s best to clear it before progressing much further on your financial journey. There are many ways to make savings in your day-to-day life that you will barely notice but that adds up quickly. These savings are a great way to clear debt. Here are my favourite methods for saving in the present climate:
1. Hands-off saving apps, like Plum and Moneybox. These apps use algorithms to review your spending habits. They then either identify and put aside a manageable sum in a ‘savings account’, or round up your bills to save or invest the difference. These savings can be put against debt with you barely feeling the pinch.
2. Set aside money saved due to reduced social and leisure time. Instead of spending the money saved by staying in, why not put it against your ‘bad’ debt?
3. Resist the lure of the take-out! By cutting out just one takeaway a month you can easily make an extra payment against that lingering debt.
4. It amazes me how one-degree reduction on the thermostat can result in such amazing savings at the end of the month – easy money for paying off that loan!
Step 2 – Emergency Funds
Whilst it may not be a cure-all, having an emergency fund of around three times your monthly take-home is a simple but effective way of weathering the financial storm, giving you breathing space if the worst should happen. The Office for National Statistics, in its December release, records the Unemployment rate as 4.9% in the three months to October 2020, 1.2% higher than the same period the year before.
Use the same saving techniques used to clear debt to put together an emergency fund. There are various products on the market that give you the easy access required for this type of fund, but the most common are Bank and Building Society Accounts and NS&I products. There may be an interest penalty (loss of interest) on withdrawal depending on the terms and conditions.
Depending on your personal circumstances, emergency funds can be developed at the same time as clearing debt or moving on to Step 3, below).
Step 3 – Building a Portfolio
Once you are financially stable its time to look at your financial security. How you go about doing this will depend on your personal situation, as well as your priorities and mindset.
There are a range of products on the market to meet a broad range of consumer needs. You may be risk-averse, not a bad thing in these unprecedented times, and so you may be more comfortable with lower investment risk. These products are likely to provide a lower return but your capital will be safer than with some more risky products.
You will want to be mindful of your future earning potential. If you have high earning potential then you may be inclined towards products that offer growth returns, as opposed to income returns that are more attractive to those with lower earning potential.
Those who have less experience in investing may find Collective Investment Schemes more appropriate than a direct investment in the equity markets. With the vaccine and the tentative promise of a return to normal, there is the hope of growth over time in 2021, however, we may not expect a return to pre-COVID-19 levels until much later.
Whatever approach you take, you will want to consider the tax position on your portfolio. Very often the products outlined above can be wrapped in an ISA for tax efficiency. Multiple ISAs can be taken out within a financial year, so long as they are of a different category (e.g. Stocks and Shares, Innovative Finance, Lifetime, etc.). A total of twenty thousand pounds per year (2020/21) can be saved tax-free.
Whilst building your portfolio and facing the challenges that may await us in 2021 do not lose sight of the future need for a pension, as the state pension on its own is unlikely to provide for a comfortable retirement. Again, a broad range of products exists to meet consumers’ needs.
If you implement the above steps then 2021 will likely be a more prosperous year, let us also hope for a much healthier one too!