Managing money during 2011 is going to be challenging. With VAT having risen from 17.5% to 20% at the beginning of January, and many of the Government’s cuts hitting us from the start of the new tax year in April, it’s the financially savvy who stand more chance of surviving.
Our personal finances are being stretched in many ways:
- Inflation – The Bank of England’s target is to keep inflation at 2%, or lower, yet 2011 began with the news that the UK’s Consumer Price Index (CPI) was 3.7% in December 2010, up from 3.3% in November. January’s VAT rise, along with global pressures on energy and food commodities in particular, explains why some analysts are predicting inflation will be even higher during the first quarter of 2011. Bank of England Governor, Mervyn King, hinted inflation could hit 5% this year.
- Falling disposable income – City firm, Goldman Sachs, have estimated that the VAT rise will cost households 1% of their 2011 disposable income. Pay freezes in the public sector, and some private sector businesses, means that many salaries will remain static, so households will have to find cuts in their own spending to meet price rises.
- Over-cautious lending – Having been accused of lending too freely, banks are now perceived as being too cautious when it comes to lending. They are charging higher rates of interest on riskier, unsecured debts, such as personal loans and credit cards. During 2010, total mortgage lending in the UK fell to its lowest level in nine years, and first time buyers need to find deposits of up to 15%, (£25,000 for an average-priced, UK house). Tough, when you consider how low savings rates are.
The days of putting savings into a bank account and forgetting about them, or applying for a credit card or personal loan from a bank, purely because it is your current account provider, are long gone. In 2011, it’s time to be proactive and work hard at making the most efficient use of your money.
Last year, consumer group Which? claimed that savers were losing £12 billion in interest, purely for leaving their money in low-rate savings accounts. Even today, many of the major high street banks and building societies have old savings accounts paying 0.1%, gross. With inflation at nearly 4%, savers need to earn interest of at least this figure, just to retain their existing spending power. To make your money work harder:
- Look for higher paying accounts. Instant access savings in the best-buy tables are currently paying between 2%-3%, some a little higher. They’re not inflation-beating, but they do mean your spending power isn’t being eroded as quickly.
- There are currently fixed-rate savings accounts offering more than 4%, although you’ll need to tie your money up for between 2 to 3 years. Whilst no one can guarantee what will happen to savings rates, many analysts forecast that the Bank of England will raise interest rates at some point during 2011.
- Make the most of your existing tax-free allowances. Individual Savings Accounts, ISAs, allow you to earn interest on your savings, tax-free. Limits apply as to how much you can save each year, (currently £5,100, per person), and top accounts are offering around 3% on instant access ISAs. Higher rates can be found on fixed deals, if you tie up your money for a period. There is some good news – the Government announced last year that ISA allowance limits will rise with inflation each year, so from 6th April 2011, the amount that can be invested in a cash ISA will increase to £5,340.
The unexpected contraction of the UK economy for the final three months of 2010 caused the stock market to fall briefly. Analysts disagree how shares and other investments will perform throughout this difficult economic year. Investors with funds they’re prepared to risk on the stock market, should make effective use of the tax-efficient investments. A Stocks and Share ISA account currently has a £5,100 investment limit for 2010/11, or if no Cash ISA is held, this is doubled to £10,200. From April 2011, this increases to £5,340, and £10,680 respectively.
As we discover what the rest of 2011 holds in store for our money, one message is clear. The more time you invest in managing money, the better the rewards you will reap.