On the first of January it is customary for us to step forward with our best laid plans as we proclaim “this is going to be the best year ever!” and “this is going to be my year!”
Such bold statements are usually followed by:
“I’m joining the gym!”
“I’m going to get a new job this year!”
“I’m going to stop watching rubbish on TV!”
Usually, by about three weeks in (at best) we’ve broken these new resolutions and have accepted that the ‘new me’ can wait for another 12 months.
Whilst the concept of New Year resolutions has become a bit of a modern day joke, the history behind them contains more meaning.
According to records, the ancient Babylonians are said to have been the first people to make New Year’s resolutions, some 4,000 years ago. They were also the first to hold recorded celebrations in honour of the new year—though for them the year began not in January but in mid-March, when the crops were planted.
What makes this interesting is that before its downfall through wars and other unrest, Babylon was regarded as one of the wealthiest and most successful regions around. So maybe there is some logic in taking your New Year resolutions seriously!
Perhaps the more interesting aspect when looking at the example of the Babylonians, is that their approach is based on celebrating the fact that something material has happened first (the planting of crops). The modern day approach is the opposite. We celebrate the date first, and then hope the actions will follow.
The great news for us, is if we wanted to follow the Babylonian approach, we already have the perfect date ready for those New Year resolutions. And that date is 6th April.
The alternative new year
If we consider the 6th April to plan our New Year resolutions around, it actually makes a lot of sense. The problem with 1st January is that in terms of getting in shape you’re literally going from one extreme to another, from daily feasting to daily drought. It’s also dark and cold, with the thought of going outside particularly uninviting. Why would anyone want to go for a run in the middle of winter?
If we jump to 6th April however, the weather is starting to get a lot more pleasant, daylight hours are increasing, and we’re getting nearer holiday season (so we won’t peak too soon). The 6th April is also the start of new financial years for many companies. This means new departmental budgets, which in turn leads to the creation of new job opportunities, perfect for those looking for a fresh challenge.
There’s also another great reason to use 6th April for the start of your New Year celebrations. It’s the start of the new tax year. And that means a whole new year of financial opportunities that open up for you and your investments.
Time is money
The key thing with investing in the tax year, is the earlier you start, the better. Allowing your investments to grow for the full 12 months whilst taking advantage of the various tax incentives/benefits will add huge value over the long term.
Consider these scenarios:
- Person A invests £20k into his ISA at the beginning of the tax year.
- Person B invests £20k into his ISA at the end of the tax year.
- Person C invests £20k at the beginning of the year into similar investments but doesn’t utilise an ISA wrapper.
- In all scenarios, the investors receive a return of 5% pa after costs.
- All investors pay a rate of tax of 20%.
As you can see, Person A has the higher valuation at all timeframes. Interestingly, in the first five years, investing early also outweighs the tax benefits of saving into an ISA (Person C’s portfolio has outgrown that of Person B).
Whilst it’s not surprising that utilising a tax wrapper such as an ISA allows your investments to achieve greater growth, what it does show is the importance of maximising your opportunities.
Just by investing at the start of the year compared to the end of the year, could generate you an extra £13k over a 10-year timeframe or even £33k over a 20-year time frame (based on the assumptions used). And the great thing is, this has nothing to do with investment strategy, moving your money around the market, or otherwise. This is simply about utilising good financial planning to maximise the opportunities available to you.
As well as utilising your ISA allowances, there are many other financial opportunities you should be considering at the start of the new tax year, such as:
- Tax relief on pension contributions.
- Capital gains annual exemptions.
- Junior ISAs.
- Lifetime gifts.
The opportunities available vary from one individual to the next, and so if you would like to find out what may be applicable to you, please get in touch.
It is after all, the perfect time to start those New Year resolutions!
The figures and assumptions provided should be used as a guide only and should not be relied on as a recommendation or advice that any particular investment is suitable for you.
The value of investments can fall as well as rise. You may not get back what you invest.