OK, there are a few things you need to review annually, so let's look at them in more detail.
Review Your Budget
In light of your reviews of cashflow and your calendar, plan your spending for the coming year. Did you overspend last Christmas? If so, dial up your monthly Christmas budget in your sinking fund so it doesn’t happen next time. Or just resolve to stick to the budget next time!
Do you need to set up sinking funds for forthcoming bills so you have the money on hand when they appear? Estimate the expected bill, divide between the number of pay days between now and then and budget that money accordingly.
If necessary, set aside funds now so that it’s done and doesn’t get forgotten about. Use the pots feature in your banking app, or physically move the money into a different account or whatever works for you so it’s set aside. If there is more than one of you in a household partnership, do this exercise together as it’s important to be on the same page where possible.
Review Your Savings Rate
We’ve talked about spending, but what about saving? Paying yourself first is a golden rule of wealth-building, so when setting your spending plan, review how much is going into your short- and long-term savings. Take the opportunity to increase the figure if you can.
Actually, even if you think you can’t – do it anyway. You can always dial it back again if things get too much of a pinch. It doesn’t have to be a large amount; just a tenner a month if needs be. That little bit extra each month will really help you.
Have you had a pay rise? Did your savings rate increase of the back of that? What about a promotion or a job change? Did you take that opportunity to adjust your savings rate? If not, do so now.
Can you salary sacrifice into your pension? Maybe you’ve never broached it with your employer. Make a note to do it soon – you could end up with more money going into your pension with no drop in take-home pay.
Your savings rate is technically a percentage of your pay. Whether you calculate it on gross or net pay doesn’t matter, just be consistent. You want to see that rate rise each year, ideally, even if it’s by a single digit.
Review Your Savings Split
Don’t just review the amount of money you’re saving, also review where it is going. Is the split between ISA and pension working for you? I’m not convinced there’s a ‘right’ split for any given 38- or 52-year-old person.
I tend to say that early on you should favour ISAs while paying in what you need to into your pension to get the employer match. Once your ISAs get to a tidy level, shift the balance over time towards pensions. As your earnings increase throughout your career, you should be significantly favouring pensions in my view.
Of course, if you’re aggressively pursuing FIRE, then you’ll want to keep the balance in favour of ISAs because you can’t access your pensions till later on. Everyone’s savings split is unique to them – all I can offer are rules of thumb. Ask yourself if your current savings split makes sense, or could it be tilted a little? Should it be optimised?
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