Six steps to organising your finances

An alternative to a savings account is opening up a cash mini Isa. This is a tax-free investment vehicle in which you can invest a maximum of £7,000 each tax year.

2 Spring clean
Now you know where you stand, a ‘spring clean’ is next on the agenda. Collate all your regular household bills. If you don’t have a filing system, get one in place now – it doesn’t need to be complicated, a set of folders will do. If appropriate, set up Direct Debits to pay your bills – it ensures they are paid on time every month and some utilities and firms offer a discount to DD users. Look at how you can cut your bills, perhaps by switching telephone firms, or changing your electricity and gas supplier.

3 What do I do with my existing debts?
If possible, pay off any credit card debt, overdrafts and personal loans – or at least manage the debt well. These generally come with the highest APR and are the biggest drain on your finances.

With credit cards you should, if possible, switch your balance to a card which has a lower APR, or even better, one which offers extremely low interest for credit transfers and/or an interest-free period. The key is to shop around for the best deal. Try the independent financial information website www.moneyfacts.co.uk for the latest top deals.

Talk to the bank
Don’t ignore your debts if they start getting out of control. If you are having problems keeping up, talk to your bank. This cannot be stressed enough. Keep them informed of any changes in your financial circumstances and set up a meeting with your manager (it’ll more likely be a customer adviser or loan officer).

Banks feel more disposed to work out a mutually viable solution if you approach them than if they have to start sending you red letters. Keeping in touch tells them you have recognised there is a problem and are taking a mature approach.

Alternatively, get in touch with your local Citizens Advice Bureau. CAB is experienced in dealing with debt. Find your nearest Bureau at www.nacab.org.uk.

4 Protect your income
On average, around two million people claim sickness or disability benefit each year - yet far fewer people take out income protection insurance than life cover. yet it's worth thinking about. You don't need to have a mortgage - this kind of cover will pay your rent and household bills if you are unable to work for a period of time.

Sadly, even if you have paid sufficient National Insurance contributions, you can't rely upon the State to provide for you if you cannot work through incapacity. Short and long-term incapacity benefit and statutory sick pay are barely enough to survive on.

Is it worth taking out income protection? First check what your employer offers. It may maintain full pay for several months if you are unwell, or it may have group income' cover, which will pay a taxable income.

An income protection policy replaces part of your salary if you cannot work. the income from your own IP policy is tax-free and you are usually allowed to replace between 50% and 60% of your gross salary. The replaced income also includes money from pensions and other protection policies and is paid until you recover or retire. You can buy cheaper, term policies which run for a set period of time. these policies won't protect you if you develop a chronic illness, so are more of a risk.

IP policies have an exclusion or excess period, which is the time between your falling ill and starting to receive benefits. This period can be as long as 100 days. The longer the exclusion period, the cheaper the premiums.

When you take out a policy, you can choose flat rate payments or increasing income, for which you pay increasing premiums. Your premiums will be calculated aged on your sex, age, lifestyle, job, health, level of payout and exclusion period.

Critical Illness Cover
This kind of cover is cheaper and simpler than IP and pays out a tax-free lump sum if you are diagnosed with a life-threatening illness. the maximum payout is usually £500,000 to £1m. They are often sold as a package with life insurance by mortgage lenders. The drawback with CIC is that it covers a narrow range of core illnesses, such as cancer and heart disease.

5 Protect your family's income
Life insurance is the most common way to protect your family's finances should anything happen to you. This type of cover pays out a tax-free lump sum or provides an income to your beneficiaries in the event that you die.

If you decide to take out life cover (if you have a mortgage you have to), you must work out how much cover you need. What would need to be paid if you were to die? Payments to consider include mortgage and loan payments, credit cards, inheritance tax, household expenses and childcare costs. You might also want to provide an emergency fund to cover the months after your death.

When you apply for life cover, the insurer will set your premiums according to your age, gender (men usually pay more), health and occupation. Insurers have in recent years shown interest in using genetic profiling (analysing your genes to assess your life expectancy) to set your premiums, but as yet this does not happen.

Life cover can pay out a lump sum as well as provide cash that can be invested to provide an income for your family. Other types of life cover are family income benefit, which pays a yearly income and mortgage-related decreasing term cover, where cover falls in line with your outstanding mortgage.

Another option is a maximum protection policy, where your premiums are paid into a investment fund. This is a cheap way to buy cover initially, but your investment is reviewed after 10 years, then every five years and your premiums are increased if you are not paying enough for the level of cover you have chosen. And as with any stock market investment, there is an element of risk.

Term insurance is the cheapest, simplest type of cover. As the name suggests, you choose the level of insurance you need and pay premiums over a set term. the lump sum is paid out tax-free to your dependants if you die during the term. A typical policy would see a 35 year old male smoker paying around £15 a month, while anon-smoker would pay on average £9. A 35-year-old female smoker would pay around £13, a non-smoker on average £7.50.

The life insurance market is very competitive, so it is worth shopping around. You should only buy cover from a company or broker that is a member of the the General Insurance Standards Council (http://www.gisc.co.uk/consumer/).

6 Save for your future
If you don't have a pension, start one now. You won't be able to rely on the State to look after you financially in your old age, so if your employer offers a company pension, you should join it, especially if your employer contributes towards it. Pensions have had a bad press in recent years, with many companies closing down their final-salary schemes and millions of retired people losing a large slice of their retirement income. This does not mean you shouldn't invest in your own future. The sooner you go about it, the better.

The older you are, the bigger the cut of your income you can invest in a personal pension.
18-35: 17.5%
36-45: 20%
46-50: 25%
51-55: 30%
56-60: 35%
61-74: 40%.

How pensions work
Simply, you invest a sum of money each month into an investment run by your pension company. Your contributions are tax-free. In theory, over the course of your pension's lifetime, you will build up a pension pot. This is then used to buy an annuity, which is a means of exchanging your lump sum for a regular income. Annuity rates change all the time, and the rate they are at when you buy your will determine how much income you get. Once you have bought an annuity you cannot get your money back.

The State pension
If you have made sufficient National Insurance contributions, you are entitled to the basic State Pension. The full basic State Pension for 2004/05 is £79.60 for a single person and £127.25 for a couple (from 12 April 2004). To get a forecast of how much pension you will receive from the government, and for basic pension advice, go to www.thepensionservice.gov.uk.

Company pension schemes
These fall into three main categories: final-salary, money purchase and stakeholder. Money purchase schemes simply invest your pension contributions and leave you with a fund with which you can buy an annuity at the end. These schemes naturally involve an element of risk, although over the long-term, investments do tend to easily outstrip the rate of inflation.

With final salary schemes, the amount you receive on retirement is based on your salary when you leave and the time you have been in the scheme. These are attractive because they are more secure than schemes which are dependant on stock market performance. However, they are becoming rarer.

Stakeholder pensions
These are low-charge, simple plans that are bound by certain rules. A pension fund cannot charge more than 1% a year on the value of each member's funds. Members must be able to transfer into or out of a stakeholder pension, or stop paying for a time, without facing any extra charge. Schemes must accept contributions as low as £20.

If you are employed, as your employer for details of its occupational pension scheme. If you are self-employed, shop around for a personal pension. You should seek advice from an independent financial adviser before buying any product.