Finally, 2023 is upon us and across the land people are doing their best to banish memories of the previous year and trying to stick to their New Year resolutions.
The road to hell is paved with good resolutions. So if you’re already bored with Veganuary, or sighing dramatically as you log your progress through dry January, I suspect your thoughts will be turning to other ways you can occupy yourself during the long wait for payday.
January is traditionally the time people face down their finances. This is often out of necessity rather than good intentions. I know from the comments and emails that I’ve received that Times Money Mentor readers are a well-informed bunch. So rather than tackle the traditional ‘how to get control of your cash’ features that usually usher in the year I’ll try something a bit different. What on earth should you do with your finances in the year ahead?
Can we predict what will happen in 2023?
Gazing in to the crystal ball is – unsurprisingly – an inexact science. The only thing that we can be sure of in 2023 is that things will remain volatile and financial matters can change dramatically in a short period of time.
The most important thing you can do is keep abreast of the news as it breaks and focus on analysis on what events might mean not only in the short term but over the year itself.
It pays to think of indirect impacts of topical news stories too. So if you’re thinking of taking a new job that pays more money, can you get to it if train strikes continue? Is a job in a technology start up a good idea in the current climate? And what’s the minimum amount of money you need to get by (and for how long if revenue dries up?)
None of these things are ‘fun’ to consider, by any stretch of the imagination. But they are vital. So knowing how far your savings will stretch in an emergency can conversely mean you might be able to take a bigger risk in 2023 than you might have thought.
Do I buy a property?
Without a doubt, the most common question I’m asked by readers is whether the housing market will improve in the year ahead. Because of the sheer volatility in the market, I’d have to say no.
Never has the divide between those who are on the housing ladder and those who are not been so stark. For the former, the fear of house price falls is palpable this year. Whereas beleaguered first-time buyers watching their meagre deposits being whittled away by rising rents are holding out for a market crash.
For over a decade now, mortgage and economic experts have been predicting a housing market collapse. Yet against all expectations prices have continued to rise exponentially – and beyond the reach of any first-time buyer without any significant deposit and resources. But trust your instincts and sense of logic.
There is more than a hint of the Emperor’s New Clothes about house prices. The average home in London costs 11 times the average wage. This varies around the UK with wage to price ratios 5.5% to 6.5% at the lowest (in the North) and 4.7% in Scotland. So it’s clear that no matter where you live in the UK, most people won’t qualify for the existing mortgage deals without a huge deposit. This creates a two-tier society where home ownership is reserved for those of independent means or who are funded by parents or grandparents. This is already fuelling a great deal of resentment among those locked out of owning a property.
Having said that, house prices are expected to fall somewhere between 4% to double digits in 2023. In addition, exceptional inflationary pressure is going to mean people with over-extended finances cannot afford their remortgages, with average increase of over £3,000 forcing them to sell or downsize. So in theory, that means more properties on the market – yet that doesn’t necessarily translate in to better prices. For one, any bargains are likely to be snapped up by people already on the ladder looking for a new home or better deal.
Finally, rising costs for landlords suggest that there won’t be much respite for renters in the foreseeable future. To my abject horror, many younger people tell me they are considering shared ownership deals. I’ll save my thoughts on that subject for a separate column, but let’s just say shared ownership – along with the whole concept of ‘affordable housing’ (an oxymoron if ever there was one) – can be a hugely expensive and challenging option.
What do I do with my savings?
Let’s go for some good news! For the first time in a decade, savings rates are pretty decent. However, many of the people I speak to worry about ‘locking away’ their cash, either because of unexpected events or sudden opportunities.
This doesn’t have to be a problem. There are lots of different types of savings accounts and eagle-eyed readers may have even noticed interest payments starting to hit their standard accounts.
As with everything, think through what the year ahead might hold before locking away your money. I’d leave three to six months’ worth of money to one side to cover your monthly expenses just in case something goes wrong. Then have a think about how much money you want to save.
Notice accounts are savings accounts that specify the amount of notice you need to give before accessing the money. Some basic savings accounts can pay up to 3% at the moment with little to no notice at all, so move that emergency money over and make it work for you. Other savings accounts can pay up to 5% or more with notice periods of 7 to 90 days. Even better rates are available for those locking in cash longer. And let’s not forget the world of cash ISAs – now finally a viable way to save once more. You can even get special rates if you are saving for a home deposit.
Check out my Times Money Mentor guide to savings here
What about investments / cryptocurrency?
Want to get rich quick? Well, there’s always investments…
…only there’s no such thing as a get rich quick scheme. And the world of investments often takes the volatilityin the real world and magnifies it exponentially, meaning it’s hard to predict how the markets might react or what the impact will be.
Just look at what happened to pension schemes when the Government’s disastrous ‘mini-budget’ whipped billions off the market. Pensions are often considered to be the elephants of the investment industry. Sturdy, reliable and long-term financial products that can weather most storms. While things have recovered, it’s a salutary reminder that any form of investment – even a cautious portfolio or bond – can lose cash short to medium term.
Just as a good mortgage broker has become invaluable if you’re buying a home, seeing a financial adviser is an absolute must for anyone who wants to invest. There are a ton of laws governing financial advice and investments, from assessing your attitude to risk to investigating your needs and requirements. But don’t assume that means you’re safe. I’ve spoken to people who have lost thousands of pounds as a consequence of poor investment advice. So it’s vital that you ask the advisor to explain everything they are explaining in plain English (get it in writing too).
Ask what happens if there’s a market panic and how quickly you can get your hands on your cash. Make sure you understand about longer term investments and how the risks are smoothed over time. Take some time to familiarise yourself with the separate components that underlie the investment ‘wrapper’, including the proportion of safer elements (savings and bonds) to riskier aspects. You’re paying for this advice – so make the adviser spell it out.
And a quick note on cryptocurrency. Don’t.
Shall I stick my cash in a pension?
Your retirement might seem a long way away. But trust me, time moves very, very quickly. Before you know it, you might find that you are twenty years off your ideal retirement age and running out of time.
Don’t panic. In most cases, there are opportunities to up the amount of cash you pay in to a pension scheme through work, or even set up a new scheme. Times Money Mentor has a great guide here.
If you’ve got a work pension scheme, then you may find that your employer will match increased pension contributions that you make from your wages each month – and there are tax benefits to this too.
Before you get going though, it’s important to focus on the basics. When can you get your hands on the cash, how much can you access without paying tax and what form do you ‘draw down’ the money?
Once again, pension advice is invaluable. This comes at a cost, but it’s worth it. However, if you don’t know where to start, the free, Government sponsored Money Helper website has a ton of information on its website (not just about pensions either). You can get free pensions advice and information by webchat, phone or even appointment in the real world – something sadly lacking these days.
One last thing. In these changing times most of us will work for many different organisations over our working lives. That means we might lose or miss our various pension schemes. You can find them for free with the Pension Tracing Service
What about the future?
Making your money work for you is essential in the year ahead. But with things changing so fast, I’ll be buffing up the crystal ball and doing my best to help you navigate what the future holds. So keep watching the news and sharing your questions and thoughts.
Featured in Times Money Mentor – Martyn James