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Banking and budgeting


Central to your financial planning will be a current account. These are essential for managing your money, allowing you to do everything from receiving your monthly pay and setting up direct debits to paying your bills and withdrawing cash for a night on the tiles. Most accounts include a debit card, a cheque book, a cheque guarantee card and an overdraft facility.

Although current accounts are easily taken for granted, they can make a significant difference to your financial position. Two key features should be examined when selecting an account - the credit interest and the overdraft facilities.

If you're the sort of person who stays in credit then the amount of interest you'll receive is important. Traditionally banks aren't very generous when it comes to paying interest on current accounts but, by shopping around, you could get as much as 4.98% on any balance.

Credit interest won't be an issue if you're more likely to be in the red than the black. Instead you'll need to check out the overdraft facilities and charges.

There are several elements to this. If you're only slightly overdrawn each month, an overdraft buffer might be sufficient. Most banks offer these but they vary from £10 to £1000.

For more serious overspending, you need to look at the authorised overdraft interest rates and associated fees. Some banks offer free overdrafts, typically for a limited period, but you can expect to pay an interest rate of up to 20% for an overdraft. On top of this a handful of the banks have authorised overdraft usage fees, which are usually a monthly charge in the region of £3 to £8.

Also be careful about going overdrawn without your bank's permission. Unauthorised overdrafts incur much higher charges, some in excess of 30%, and you're likely to be stung with additional fees and warning letters.

When comparing accounts also look out for minimum funding levels. This is the amount that some banks require you to pay in each month. Generally it's either £500 or £1000 but if you can't maintain this you might lose the features you selected the account for in the first place.

Budgeting


While a bank account allows you to manage how your money is spent, it's also important to put a budget in place so you know where your money goes. This ensures you don't run out of money a week before payday and also enables you to prepare for unexpected costs such as dentist or garage bills or more pleasant treats such as holidays.

To work out your monthly budget you need to list all your monthly income, for instance your salary, then deduct all your regular outgoings such as rent, council tax and insurance. Hopefully there should be something left at the end, which you can spend or save.

If you end up with a negative figure you will need to make some chances, either getting a new, better-paid job, or curbing your expenditure.

There are plenty of ways to reduce your monthly expenditure such as moving to better deals on financial products like your credit card or mortgage or switching to cheaper utility providers.

You can also cut back on some of your day-to-day spending. This is potentially more painful but, if you write down everything you spend, you may notice some easy ways to make savings.

Borrowing


Borrowing money can help your finances stretch a little further, and if done carefully, it won't cost you an arm and a leg either.

Credit cards are the most common way to borrow and, according to Credit Action, total credit card debt was £56 billion in March 2006.

Careful selection and usage is key to getting the most out of a credit card. Which card is best for you will depend on how you use it. If you're able to clear your balance every month, look for cards that have cashback or some form of reward such as Airmiles or Tesco Clubcard points.

If you don't do this, go for a good, low interest rate. Although many card companies charge for transferring balances, there are still 0% deals available that could be worth considering. But, be careful with these. The 0% deals are only for a limited period so make sure you transfer again before you get clobbered with interest.

Instead of switching between 0% deals you might prefer to find a low, long-term rate. These give the reassurance of a reasonable rate without the hassle of moving all the time. Competition has prompted credit card rates to plummet and you can now pick up a card with a long-term interest below 7%.

Store cards are another common form of borrowing. Although these offer special deals such as discounts and special promotion evenings, interest rates tend to be high with most cards coming with an APR of 20% or more. Therefore, if you are tempted by the deals, make sure you clear your balance each month. Otherwise it could cost you a lot more in the long run than you initially saved.

For longer term borrowing a loan may be more suitable. Interest rates tend to be lower than on credit cards, with deals available from less than 6%. Depending on the amount you want to borrow and your budget, you can decide on the length of the repayment term. But, be careful as the longer you go for, the more you'll pay in interest.

Watch out for payment protection insurance on loans and credit cards too. This will cover your monthly repayment if you are unable to work as a result of accident, sickness or unemployment but the deal offered by the loan company is rarely the most competitive so shop around if you do want this form of protection.

Budgeting


Here is an example of the sorts of things you need to consider when working out your budget.

Your monthly income

Your monthly pay

Any other income, for example, interest on savings, child benefit


Your monthly outgoings

Rent/mortgage

Council tax

Home insurance

Utilities (gas, electricity, water, telephone, internet)

Food

Clothes

Leisure (gym membership, going out)

Car (petrol, payments, tax, insurance, parking)

Credit cards

Pension

Savings

Other (medical insurance, club membership)

Your pay packet


Once you start working you'll receive a pay slip every month, or week, to show you how much you've earned, how much has been deducted and how much you will receive.

Rarely are pay slips easy to understand but here are the key things to look out for:

 

Gross pay - this is the amount you are paid before any deductions.

Net pay - this is the amount you receive after deductions are made.

 

Tax code - this determines the amount of tax you pay. In 2006/07 the standard tax code is 504L, which means you have a basic allowance of £5,035. Your tax code will change every year.

 

Income tax - the amount of money you pay each month or week in tax. In 2006/07, the first £5,035 of any money you earn is tax-free and then you are taxed at 10% on the next £2,150, 22% on the following £26,114 and at 40% on anything above £33,300. These allowances are annual and spread across the year.

 

National insurance - the amount of national insurance you pay each month or week. Employees pay 11% of everything they earn over the national insurance threshold (£84 a week in 2006/07).

 

With thanks to Interactive Investors.

 

Please e-mail comments to comments@thenewblackmagazine.com

 

 

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