Forget faddy diets or joining the gym, this advice could leave you better off for many New Years to come.
The start of a new year is a popular time to make a resolution to live your life differently, whether that’s improving your health, learning something new or managing your money more effectively. Below I’ve listed a few simple pointers for how you might improve your personal finances.
Get on top of your files, paperwork and plans and make a simple and clear summary of what you own, owe, receive and spend. I’m organised but during a recent spring clean of my personal files I found an old letter reminding me that I had an internet savings account. Upon investigation I found this account held $1,200, being interest added after I had withdrawn my capital three years previously. It pays to be organised!
Understand what you are spending
It doesn’t matter how much you earn, if you spend too much, then you will never be financially secure. If you never seem to be able to regularly save a meaningful amount, or you are racking up debt, then chances are you don’t know exactly how much you are spending and on what. Try these tips to get control of spending:
- Pay for as many things as possible via debit card. This is particularly important with small discretionary expenditure like coffee, sandwiches and newspapers etc, because without the transaction record, you’ll never identify where the money has gone.
- Download your banking records to a spreadsheet or a specialist personal finance software package so you can categorise each item of expenditure over, say, a three month period. This will enable you to work out how much you spend on fixed and variable regular costs like utility bills, mortgage and insurance premiums, and how much you spend on discretionary things like eating out, music, books and clothes.
- As the Rolling Stones song says: “You can’t always get what you want but if you try sometimes, you just might find you get what you need”. Be clear about what you need as opposed to what you want. Do you really need those new shoes, that DVD, that bag?
- Work out a budget which includes sensible allowances for petty cash and other discretionary spending and stick to it by using one of the budgeting apps which are available on smartphones.
Manage debt carefully
Although interest rates are abnormally low at present, it’s unlikely that they will stay that way forever. Even so, some types of debt, such as credit/store cards and higher cost loans, charge high interest. Debt repayment represents a risk-free, tax-free return equal to the interest you will avoid.
Try these tips to get control of debt:
- Stop adding to your debt by getting control of your spending (see above), cut up credit and store cards and close the accounts.
- Work out an affordable repayment schedule to repay the most expensive debt first.
- If you can, see if a relative or friend is prepared to lend you the funds to repay expensive debt and you to repay them that amount at a lower but still attractive interest rate. A 5 per cent interest rate will be very attractive to them and a lot lower cost than expensive debt for you.
- If you have a large mortgage, relative to your income, then think about fixing some of the interest rate for five years. Although the probability is it will cost slightly more than variable rates over that time, at least you will have the comfort of knowing what your repayments will be.
Pay yourself first
If you are still working then the chances are you aren’t saving nearly enough for when you can’t or no longer want to work. As a rough rule of thumb you should be saving around 20 per cent of your annual income, less if you are young and more if you are older. Here are some tips for helping you save more:
- Set up a regular but affordable monthly savings amount to a deposit account, to go out on the same day that you get paid. This psychologically tells you that you are paying yourself before all the usual bills and expenses that arise like clockwork each month.
- Even if the interest rate isn’t much different, direct your savings into another savings or bank account and call it something like ‘rainy day fund’, ‘emergency fund’, or ‘extras fund’ to remind you why you are saving.
- Every time you receive a rise in salary make sure you increase your savings as well.
Make sure you have enough of the right insurance
Insurance is something no one likes paying for but is always happy to claim. If you insure for what can go wrong, you can then invest for what can go right. Follow these tips for making sure you’ve got things covered:
- Always tell insurers the truth when you apply, whether it’s home, car, life or health insurance. If you don’t either your claim won’t be honoured or it may be reduced.
- Make sure you have enough of the cover you need. People with high expenses and dependants should ensure they have adequate life insurance and income protection.
- Make sure your home buildings and contents cover is adequate and the sum assured reflects the true rebuilding and contents replacement costs.
- Critical illness protection is very expensive and is usually most useful for those who want/need to be able to repay a loan in the event of suffering serious illness or disability.
Just setting aside a small amount of time each month to focus on your personal finances not only increases the chance of financial success, it will help you to avoid breaking at least one New Year resolution!