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Opt out of non-essential cookiesIf you’re one of the many people who intended that this would be the year to get your finances in order, how’s that going?
Hopefully this will help. We’re going to highlight 10 of the most common mistakes people make with their money and, more importantly, suggest a few quick ways that you can try to avoid them from now on.
One of the biggest mistakes we all make is living beyond our means. Over and above essential spending, such as mortgage or rent, food, transport and domestic bills, there are just so many other things to spend money on.
Five of the top areas of non-essential spending in the UK – and the percentage of people who make them a priority – are:
But for many of us, regular spending on some of the above non-essentials can lead to living beyond our means.
https://www.nerdwallet.com/uk/personal-finance/consumer-debt-survey-data-2024/
It can be particularly easy to overspend when you have a credit card. Unlike a debit card, you don’t need to think about whether there is enough money in your bank to cover the cost of a purchase. And you tell yourself that it’ll be ok, you will sort it out later.
If you are caught in the trap of living beyond your means, and want this to change, you will sometimes have to say no to a non-essential spend, even when you feel pressured to do so, perhaps by your partner, family, friends, social media or tempting BNPL options like Klarna.
You need to know what you can and can’t afford to spend, you need to create a budget. Let’s take a look . . .
Having a monthly budget is essential to plan how to use your money and understand where it is actually going. There is usually a gap between plans and reality!
We hear you; boring!!! And you’re not alone. Recent research from Legal and General discovered that around 46% of us feel “financially disengaged”, meaning that we are not actively managing our finances. But it’s essential. Unless we budget carefully, and monitor spending, there is a real risk that small financial problems will go unnoticed until they gradually become big issues. And nobody wants that.
https://group.legalandgeneral.com/en/newsroom/press-releases/financial-fatigue-over-24-million-adults-in-the-uk-are-financially-disengaged
Your budget should include details of all your income – money you have coming in – and expenditure – everything that needs to go out. Whether you’re a pen ‘n’ paper traditionalist, a spreadsheet lover or an app advocate, get those figures down. Somewhere. Making a budget, and monitoring your spending, will soon help you to get on top of what is happening.
Another huge mistake that many of us make is not keeping track of direct debits. Yes, direct debits are a great idea for regular bills (and some suppliers even give discounts for direct debit payments). However, if you are not careful, you can spend more than you need by using direct debits.
Many will auto renew and may well increase in the process. Many products such as phone, broadband, energy or insurance are examples of this. So make a note of when contracts are coming to an end, and make sure you get a good deal going forward.
Another thing to check with direct debits are memberships and subscriptions. Are you one of the 13 million UK adults that have accidentally taken out a subscription in the last 12 months? Or one of the millions that are still paying a subscription you no longer want or need?
Take time to check your bank account for any payments you are making but no longer need (or ever did). They may be annually, quarterly or monthly payments so check those statements; it’s well worth doing.
Going forward, avoid the ‘subscription trap’ where you think you’re making a one-off purchase but unwittingly signing up to a monthly subscription with direct debits regularly leaving your bank account. Always.Read. The. Small. Print
https://www.citizensadvice.org.uk/about-us/media-centre/press-releases/consumers-spend-688-million-on-unused-subscriptions-in-the-last-year
When contracts are coming to an end (phone, broadband, energy or insurance) always try to get a better deal. Otherwise you will end up paying more money for the same service that you are already getting for less.
The first step is to contact your current provider to explain that you are thinking of switching to get a better deal. They will usually offer you a better value deal to keep you as a customer.
If this doesn’t work, or if you think you could still be paying less, start checking out other potential providers to find a better deal. Websites that can help with this are:
https://www.which.co.uk/news/article/switching-can-slash-mobile-broadband-and-pay-tv-bills-by-up-to-250-a4knM6a5gGh5
Financial experts recommend having savings to cover at least three months living expenses. But just over half of us – 27 million – would not be able to live off our savings for more than one month.
And as well as providing the security of an emergency fund, savings can bring other positive benefits such as being put towards major purchases – such as cars, holidays, home improvements – and family events and celebrations.
So we all know it makes sense to have savings, but 46% of UK adults have £1,000 or less in savings, 25% have £200 or less, and 16% have no savings at all.
https://www.finder.com/uk/savings-accounts/saving-statistics
One of the key financial priorities you can make for the rest of 2024 is to start building up some savings. Easier said than done, right? But it doesn’t matter how small you start, as long as you do.
The first thing to do is to open a new savings account, separate from your main bank account. Look for an account that pays a good rate of interest but that also would enable you to get your money out if you need it for any kind of emergency.
Once your savings account is open, start putting a little bit of money into it every week or month. It really doesn’t matter how small a sum of money this is: the main thing is to establish the habit of saving. Why not set up a regular direct debit to pay money into the account, then you don’t even need to think about it.
If you do already have savings (well done you!), another money mistake is to leave those savings in a low interest account. Recent research from Finder found that of those adults in the UK who have savings over £1,000 (around 54%), the average amount of those savings is £11,185. At the moment, interest rates are still quite high for savers, and it is definitely worth looking around for the best place for your savings that will make them work harder for you.
As of June 2024 there are many savings accounts offering 5% interest or higher, some up to as much as 7%. Look for an account that pays good interest but that also allows you to withdraw money without penalties. Then, even if you only save a little bit of money every month, you will start earning extra money in interest.
https://www.thetimes.com/money-mentor/banking-saving/savings-accounts/best-savings-accounts
No matter how young you are, the earlier you start pension planning, the more likely you are to be comfortably off financially when you retire. The current state pension age will rise to 67 by the end of 2028, and a further rise to age 68 by 2046 is under review.
But if you are in employment, earn more than £10,000 per year and are aged between 22 and state pension age you should also be automatically enrolled into your occupational pension scheme. If so, you will also usually have the option of making extra payments into it. This is definitely worth considering. Not only will additional contributions increase the value of your pension but you will also pay less tax as pension contributions are deducted from your salary before tax.
Even if you have an occupational pension scheme, you are also able to take out a private pension and make payments into this on either a regular or lump sum basis. Similarly to additional occupational pension contributions, these payments will usually be eligible for tax relief. Most private pensions can be accessed earlier than state pension age – generally from age 55 – and 25% of it withdrawn tax free. All of which could provide useful income for your future plans.
https://www.gov.uk/government/statistics/personal-and-stakeholder-pensions-statistics/private-pension-statistics-commentary-september-2022
Around 64% adults in the UK have at least one credit card, and 30% of UK adults use their credit cards at least some of the time, according to research by Finder. However, unless the balance is paid off either significantly or in full each month, credit card debt can mount up very quickly.
If you don’t pay off your credit card balance in full each month, you will be charged interest on the balance. Interest rates on credit cards are usually high and this will add to the overall amount that is owed. If you just pay the minimum amount each month, interest will quickly mount up and even get to the point where your payment is all going towards paying off the interest, not the remaining balance on your card.
https://www.money.co.uk/credit-cards/credit-card-statistics
According to The Money Charity the average credit card debt in the UK is £2,363. For a credit card with an average interest rate, just paying the minimum amount each month would take 26 years and three months to repay this debt. No thank you.
Everyone in the UK has a credit report and is determined by the three main Credit Reporting Agencies (CRAs) in the UK:
It is important to check your credit report thoroughly for errors, particularly if your credit score is lower than you expected it to be. Mistakes do happen. You need to make sure that all your information is correct and up to date, including personal information – such as your address and date of birth – as well as financial information.
Also make sure that your report does not show you as having financial links to anyone if this is no longer the case. For example, if your ex-spouse or partner has a poor credit score and you are shown as still being linked to them financially, this could adversely affect your score too.
https://www.royallondon.com/about-us/media/media-centre/press-releases/press-releases-2023/january/over-nine-million-uk-adults-could-have-mistakes-on-their-credit-files/
Another big money mistake is not knowing how much tax you should be paying. Your allocated HMRC tax code indicates how much you can earn before having to pay tax. The code is a series of letters and numbers, and for most people it will be 1257L, which means that you are entitled to the full tax free Personal Allowance of £12,570.
If your code is different from the above and you don’t understand why, then contact HMRC to check whether there has been a mistake.
If you are self-employed, there are various business expenses that you can deduct from your income before paying tax: which means that there will be less tax to pay. These include:
And if you are employed but work from home for all or part of the week, you may be able to claim tax relief for additional household costs. See the Gov UK website for further advice for the self-employed and those who work from home.
https://www.which.co.uk/news/article/tax-code-errors-costing-billions-how-to-check-youre-on-the-right-one-a43Ug8z6FfDZ
And even if you do not pay tax, but are married or have a civil partner, did you know that you can claim the Marriage Allowance for your partner? You can transfer £1,260 of your Personal Allowance to your spouse or civil partner, which would reduce their tax by up to £252 in the current tax year. To find out more about how to do this, check out the Gov UK website.
So those are some of the top money mistakes and, you know what a certain Benjamin Franklin once said?
Now go forth with this new knowledge and let those mistakes be a thing of the past…
If you have any additional mistakes or solutions you’d like to add, feel free to comment below.