The Institute of Financial Planning (IFP) is conducting the first ever UK Financial Planning Week (8 -14 September). This is a completely impartial and independent campaign which is one of the most important personal finance initiatives conducted in the UK for many years.

Financial Planning Week aims to get people to think about their financial situation, the importance of planning to their daily lives and their future, to help them to work out their life goals and to take some positive steps towards achieving them.

The week will cater for the needs of a wide range of people from the debt laden to the more affluent. The main aim will be to cut through the jargon so often associated with the financial world, and just direct people to a clear yet unbiased path towards some of the simple processes they can follow to make a difference to their own situations – regardless of what that may be.

The IFP is co-ordinating some of this information as well as tools, calculator and tips into the Financial Planning Week website – www.financialplanningweek.org.uk which goes live from September 1st. Promoting a greater understanding of the Financial Planning process, the Week will enable people to make smarter decisions in respect of their financial affairs.

With the credit crunch really beginning to bite, there’s never been a more appropriate time to focus on the need for effective planning by everyone as a part of their daily life, and a successful campaign could make a real difference to the financial future of many people.

1. Understand your Current Position

It might sound like stating the obvious but the starting point of any financial planning strategy should be to find out where you are. Even if you know where you want to get to, if you don’t know where you currently are you are likely to be much less efficient in your route to financial success.

The four main aspects for your current financial position are income, expenditure, assets and liabilities. If you have a good understanding of these, you are already one step ahead of most people.

With your income, you should make the distinction between earned income, rental income and other income. Bank/building society interest and dividends from investments are not really income, they are just a return on your investment. Earned income would be salary/bonus or pension income if you are retired. Rather than using a gross income figure, you should work out what your net monthly income is.

Have you noticed any trends in your income over recent years? Are you currently a higher rate taxpayer or likely to be one in the near future? If your partner is also working is he or she a higher rate taxpayer?

If you have worked out your net after tax income you will have already calculated how much you “spend” on Income Tax and National Insurance each year. You should then work out as accurately as possible how much you spend over the course of the year. This should be divided between essentials such as household bills and items that are nice but non-essential, such as holidays. Take care not to include monthly savings into bank accounts or investments as expenditure.

Quite simply, if your net income is lower than your expenditure then you’ve got a problem that needs addressing. Any excess income over expenditure is available for you to invest for your long-term financial well-being.

The next step is to analyse your assets. This could be your home, your investment property, your investment portfolio, your pension or your savings account from example. Once you have a headline summary of your assets, you should try to work out what the tax treatment of each is. Are they tax-efficient based on your current income tax position? It is very easy to increase returns without increasing risk, just by making your investments more tax-efficient. Few people do this very diligently though. Finally, list your liabilities and make a note of what interest rates you are paying on each. If you don’t know what the interest rate is, and most people don’t, find out as a priority.

2. Don’t Go With the SVR

Most people don’t choose a Standard Variable Rate (SVR) mortgage; it’s the rate your lender switches you to when your initial offer period expires. With many 2 and 3 year fixed rate mortgage deals coming to an end, homeowners should be very careful not to get stuck on their lender’s SVR. The Bank of England Base rate was 4.5% in December 2005. It is now 5%. SVRs are usually 1% to 2% higher than this.

You could therefore easily see a rise from 4.5% to 7% on your mortgage interest rate. On a £200,000 interest only mortgage, this would represent an extra £416.66 per month of interest. Whilst borrowers will have to accept an increase in mortgage costs, taking no action and accepting the SVR will not lead to a comfortable 2008. If you find that you are currently paying your lender’s SVR, it’s never too late to remortgage to a cheaper deal but make sure that you check the terms and conditions of your existing mortgage first.

3. Improve the Rate of Return on Your Cash
You should make sure that you are getting a decent return on your savings. Whereas many current accounts pay a negligible amount of interest, good savings accounts will pay in excess of Bank of England Base Rates for their easy access accounts. At the time of writing, Base Rates stand at 5% p.a. Higher interest rates can be obtained through notice accounts if you are prepared to tie your money up for a given period of time.

It is not practical to always be chopping and changing savings accounts but you should make sure that the interest rate is at an acceptable level. With this in mind, be careful with accounts that pay a very attractive introductory interest rate and then systematically cut this. With these accounts, banks are relying on saver apathy to keep the business.

Taking an example of £10,000 in a nil interest current account, if this were moved to a savings account paying 5% interest per annum, this would represent additional interest of £550 each year before tax. That could pay for a weekend in Paris! This may seem like a very simplistic financial planning strategy but the truth is that far too many people throw money away by not managing their cash effectively. Don’t let it be you!

4. Improve the Tax Efficiency of your Cash
Following on from the example above, £550 of interest before tax would equal £330 after tax for a higher rate taxpayer and £440 after tax for a basic rate taxpayer. A nil taxpayer should complete a R85 form to enable them to receive the interest gross.

It can really make sense to take advantage of the different taxation levels to maximise your after tax return. For example, if you and your partner have joint finances, you should make sure that most of your cash is held in the name of the lower taxpayer. A higher rate taxpayer will pay 40% income tax on savings where as a basic rate taxpayer will only pay 20%.

In many cases, one partner will be a higher rate taxpayer and one partner a nil taxpayer. Therefore, on the example of £10,000 attracting 5.5% p.a. interest, a simple strategy like this could represent the difference between having £330 in your pocket and £550. Many couples hold their savings in joint accounts but remember that interest on these will be taxed as if 50% is one partner’s and 50% the other’s. This is therefore not always tax-efficient. The above therefore represents another way of vastly improving your net return without having to take any additional investment risk at all.

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Jason Witcombe (pictured) APFS, CFPCM is a Chartered Financial Planner at Evolve Financial Planning. He has been awarded prestigious Chartered Financial Planner status, a qualification that only around 1400 of the UK’s 65,000 qualified advisers have attained. He is also a Certified Financial Planner and is an Associate of the Personal Finance Society. www.evolvefp.com