Higher interest rates and the rapid increase in the cost of living are likely to be affecting many areas of your finances. The start of the year is the perfect time to think about any concerns you may have and to ensure you’re making the most of your money.
After many years of low rates, savings accounts have made a substantial comeback following a series of interest rate rises from the Bank of England throughout 2022. Yet with inflation rocketing, the value of your money is shrinking in real terms so it’s important to maximise every penny of interest in order to mitigate the impact. There are a few things you can do. For example, you could make your savings work even harder by paying more into an ISA. Investing is another route if you have longer-term goals and you don’t need to access the money for at least the next few years.
Loans and credit cards
Rising interest rates can also push up the repayments on any debts, including bank loans, car finance and credit cards. If you have a personal loan or car finance agreement, you probably agreed a fixed deal – so the latest rate rise is unlikely to affect you until the term of the agreement comes to an end.
When it comes to your investments, it’s important not to react to any ups and downs in your portfolio and avoid making emotional decisions that could cost you in the long run. Staying invested and having a diverse portfolio spread across a variety of assets (likes stocks and bonds) and geographical regions can help soften the blow if one area suffers in uncertain times. Whenever possible, you should remain focused on your long-term financial goals.
Your annual tax-free pension contribution allowance is £40,000, although it can be lower for higher earners and if you’ve already accessed your pension savings. Any contributions by you (or your employer) receive tax relief from the government of 20% or more – and the money in your pension pot will grow tax free. You may be eligible if you are still registered with the pension scheme and have earned in the current tax year the amount you (or your employer) would like to contribute.
If you have a fixed-rate mortgage then your rate of interest is set until the initial fixed term ends. After this, you could end up paying more if you have a tracker mortgage – which tracks the Bank of England base rate – or standard variable rate (SVR) mortgage set by your lender. You may also want to review or change your product, which could save you money however there may be fees involved when changing your mortgage product. If your finances allow, you may want to start making overpayments on your mortgage. It could help bring down your overall mortgage amount, which means you’d be paying less interest on it. This is another area where you can decide whether it’s a beneficial move and can check the small print in your mortgage agreement to see if it’s allowed.
Here are some other things to consider when giving your finances a spring clean: