Yahoo Finance How to make sure 2021 begins with a fresh financial start
New Year’s resolutions are usually focused around health, diets and fitness, particularly with so many of us having overindulged over the various lockdowns of 2020.
However, the start of a new year is a great opportunity to set new financial goals and put in place practical measures to achieve them. While looking after your finances may seem far from exciting, setting money-based resolutions can be hugely beneficial in the long-run.
“A financial plan isn’t about living like a monk, and it’s definitely not just for rich people. Financial planning is about striking a balance between your needs and happiness now, and giving yourself confidence that you can continue to be happy in the future,” says Ben Rodgers, chartered financial planner at Equilibrium Financial Planning.
“It’s often easier said than done, but getting to grips and ‘future-proofing’ your finances early has never been more important. The start of a new year is the perfect time to hit refresh on your financial situation – people tend to head into January with a renewed focus and a willingness to be objective about which areas of their lives need fine-tuning or rejigging.”
And while focusing on your health at the start of the year is never a bad thing, analysing and bettering your financial health is important too. Money can have a direct impact on your mental health, with a 2018 study showing that those with financial worries are 380% more likely to suffer from anxiety and panic attacks.
“It can be a bit overwhelming at the beginning, but future proofing your finances is a journey and the following seven pieces of advice should be a good jumping-off point,” Rodgers says.
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Don’t put it off
It can be easy to put off getting your finances in order, particularly if it involves paperwork.
“Starting early means you can make small amounts work harder for you over the long term meaning you won’t have to sacrifice as much later on,” Rodgers says. “The power of time can turn even modest amounts into a confident and enjoyable future.”
Set some goals
“Before setting new year’s resolutions and making savings plans that are completely unrealistic, you need to have an idea of where you’re trying to get to,” Rodgers says.
He advises thinking about what “financial confidence” means to you. This might mean creating a safety net in case of a crisis like redundancy, or paying off a credit card.
“Once you know where you’re trying to get to, though, you can set some specific goals to get you there,”
Rodgers adds. “You might want to feel financially confident but not know what this means for you yet, and have a hunch that paying down your credit card and building a rainy day fund seems like a sensible place to start. That’s fine. So long as your goals are realistic, it still gives you something to work towards. You can always change them later.”
Set a budget
It’s hard to work out what you can afford to put aside for the future because you still need money for today.
Setting a budget can help you work out exactly how much you need in the present, for essential outgoings like rent, bills and food, as well as extras.
“It doesn’t need to be an in-depth analysis of every penny you spend, and it definitely isn’t about feeling guilty for buying things,” Rodgers says.
“Budgeting is simply about knowing what money is coming in and how you allocate it. You’ll need to find what works for you, but the ‘50-20-30’ rule of thumb is a simple, tried and tested model that can start you on your way to financial confidence,” he adds. “This means that you 50% goes on necessities, 30% goes on things you want, and 20% of your wage goes on repaying debts and saving for the future.”
Automate your savings
Managing money is about managing your behaviour too. You can create the best budget in the world, but it means nothing if you get tempted and decide to spend it.
“Think of all the direct debits coming from your account each month. Do you notice them going out? Probably not,” says Rodgers. “Once you know what you can afford to save or invest each month, try to automate it by setting up a direct debit. By doing so, it becomes a habit and you avoid temptation.”
Get to know your debt
“Debt can often come with judgement, but the truth is, not all debt is bad. You just need to understand its true nature,” Rodgers explains. “In simple terms, if the interest rate on your high-cost debt, like credit cards or overdrafts, is more than the return you get on any investment, then you are actually making an overall loss.
“Time can be your biggest ally when constructing your financial future but it can be your worst enemy if left to work against you,” he adds. “So when considering your future financial goals, identifying and paying down expensive debt should be a priority before you even consider saving or investing.”
Take advantage of free money
Many people don’t necessarily realise that some employers will pay more into your pension pot if you increase the amount you pay in too. “Although it depends on your employer, this can be anywhere from 5% up to 15% of your pre-tax pay,” says Rodgers.
“What’s more, you won’t pay income tax on the amount you pay. So if you’re earning £25,000 ($339,000) a year and your employer will match up to 10% pension contributions, you could be more than doubling your money for the sake of £166 per month,” he says. “Tapping into the power of time and making the most of free money is an important step towards your future financial freedom.”
