As we wrap up the year and head into 2022, many of us will be reflecting on the year gone by and vowing to do some things differently come January.
This will likely include making some financial resolutions. In a survey of 2,000 people commissioned by Hargreaves Landsdown in September, the most common financial resolution people want to make is to pay off their debt — something one in five (20%) people want to get sorted.
At the end of last year, money.co.uk estimated that around eight in 10 UK adults will carry debt into 2021, with the most common reason for holding debt in 2020 being “normal living expenses”.
The second most popular resolution was lowering household bills (17%), which has become even more of a priority now energy prices are soaring.
In third place was a promise to pay more into savings (15%).
The fourth most common financial resolution Brits want to make is is understanding where they stand with pensions (8%), which can often be complicated especially the more we move jobs.
In joint fifth place was starting to save and putting more into pensions (7%). In joint sixth place was protecting family with insurance and investing (5%).
“At the moment, many of us are carrying Christmas debts, so it’s hardly surprising that paying this off is our top priority. But it’s not just about fixing broken aspects of our finances. We’re also pledging to build savings, pay more into pensions, and sort protection and investment," said Sarah Coles, senior personal finance analyst, Hargreaves Lansdown.
She believes there are five steps that can guarantee Brits will achieve all of the most popular resolutions, and, more importantly, stick to them.
The first step is to spend an hour or so, perhaps on the quieter days between Christmas and New Year, to take stock of debts, savings, pensions and investments.
Next, work out goals for each. When it comes to debts, the goal is usually to pay down any expensive debts.
For savings, it’s building an emergency savings safety net of three to six months’ worth of essential expenses if you’re of working age.
In pension terms, the Pensions and Lifetime Savings Association estimates that for a moderate retirement a single person needs £20,800 ($27,559) per year, including their state pension, and for a more comfortable one they need £33,600.
When working out how much you need in your pension pot in order to generate these sums, if you plan to draw the income generated from your pension, it’s reasonable to work on the basis that you might be able to take 4% of the pot a year, said Coles.
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However, the actual amount you can take will vary depending on the income produced.
Step three, as per Coles, is working out a budget: see what you have coming in and going out, then use an online calculator to play with the figures in order to free up a lump sum of cash each month.
Part of this process is making sure you’re not overpaying on your bills. Right now, soaring energy prices mean you can’t get a better deal than the price cap, but you should keep an eye on changes over the next few months.
In the interim you can shop around for deals on mobiles, media and broadband.
Step four is using the cash freed up to sort out debts.
“If you have debts, it’s worth seeing whether you can switch them somewhere less expensive, so more of your monthly payments can go into paying them off,” said Coles.
“Then with the extra cash you have freed up, set up a monthly direct debit to pay them down as quickly as possible.”
Once the expensive debts are paid off, you should have more extra cash in your budget, which you can use to buy insurance cover to protect your family.
You can also redirect part of your monthly direct debit into a savings account, to build up emergency savings, and part of it into your pension.
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“If at any stage, this starts to get overwhelming, the key is to get some help rather than giving up,” said Coles.
You can approach a debt charity like Stepchange and there is plenty of information online including on the Money Helper website.
“If you’re wrestling with complicated situations involving larger sums, it’s always worth considering taking advice.”
The last step is to invest if, once all other aspects of your finances are sorted, you still feel you are in a position to do so. This will help you make the most of your money.