The end of the year is fast approaching, and with that might come the realisation that you haven't achieved the financial goals you set for yourself at the start of 2017. I’m here to tell you that although, yes, 9 months have flitted by, there are 3 months left. And even though it may not be sufficient time to do a complete overhaul of your finances, it is enough to allow you to make some big strides in the right direction, and ensure you won't be on the brink of financial ruin by the time the new year rolls around.
Why it’s a good time
Summer is undoubtedly a time of year when the average family tends to loosen the reigns on their finances and go on a bit of a splurge. Now that it’s over, it’s an ideal time to look at where you stand and make some decisions.
Why it’s worth the effort
Fortune Magazine reports that two out of three Americans literally lose sleep over their finances. What’s more, it has been reported in the UK that money is the #1 cause for relationship problems. Whether or not you’ve acknowledged it before, you could be sitting, even unknowingly, in one of those camps. Living pay cheque to pay cheque is not a comfortable situation (and may turn out to be downright dangerous in the event of major unexpected expenses!), not to mention limiting your happiness. Having the right attitude towards financial assessment is key. Chances are, if you only think of getting your finances under control as just about curbing your spending, you might be likely to adopt the perilous head-in-the-sand posture. However, thinking of it as a way to allow you to have more money to spend on things you really enjoy will motivate you to make the necessary changes.
The 6 things you can do right now to start getting your finances in order
1. Determine where you’d like to be
This might seem like an upside-down way to approach the matter, but the fact is that you may be among the many who would feel intimidated or even bored if asked to start by looking at their spending first. Rather, start by doing a bit of introspection, dreaming even! What would you like to change in your life; where do you want to be? Would you like to perhaps be able to afford working part-time instead of full-time? How about amassing capital to start your own business? Do you dream about getting out of the rent cycle and putting down a deposit on your very own home? Or perhaps you just want to remove that cloud of debt hanging over your head? It doesn’t really matter what your answer is; the important thing is that you have a clear vision of where you want to be. That is your goal. A specific goal in mind will serve as a powerful impetus towards achieving good financial health.
2. Examine where you are now
Now that you have an express objective in mind, it’s time to find out where you stand right now. Begin by looking at the big picture- what’s your net worth. Don’t feel intimidated by the term, it sounds fancy, but it’s really a straightforward figure you’re sure to be able to work out. It’s a great tool to measure your overall financial position now and track your progress year on year.
Quite simply, it’s looking at your total debt in relation to your earnings. So think, not of what you pay in monthly installments, but what you owe for various things all together. So, for example, you may have a loan of some sort that you pay a set £200 towards each month, but the total amount that you owe may be £10,000. Add together the total sum all such expenses (a.k.a your liabilities), including car loans, student loans, credit card balances etc. Next, list the value of everything you own, a.k.a your assets.
If you own your own home and/or car and/or business, write down the value of those, plus any cash, savings or investments you may have. Lastly, add up the estimated value of anything of value you may have, for example, expensive jewelry, art, equipment, expensive items of clothing, basically anything you have that would be worth a substantial amount if you had to sell them. As the final step, take the total of your liabilities, and subtract it from your total assets. The figure you’re left with is you net worth. Now, don’t be discouraged if the figure is smaller than you imagined it would be, or even if it is negative, as is often the case. View it as a starting point, and perhaps a reality check that will motivate you to make some changes.
Tip: don’t be afraid to get professional help in doing these calculations from an accredited financial adviser or accountant.
3. Make a budget
Those three words may be enough to scare the daylights out of you. You’re not alone- lots of people think of this as being daunting, time-consuming and just plain beyond their capabilities. I promise you- it’s not! A budget is a must have weapon in your war against debt and over-spending, and now more than ever, there are so many tools to help. Can you set aside just 30 minutes out of your busy schedule? That’s great! Because that’s all it takes to get you well on your way to having your very own budget. There are several sites like the Citizen’s Advice Bureau and Money Saving Expert that make budget creation a breeze. All you need to do to get started is to gather up your:
- Last 3 months bank statements (preferably three months)
- Payslips (plus any other side-income you may have)
- A list of all household bills (think utilities, phone bills, travel expenses, council tax etc)
- Receipts (include anything you’ve paid for in cash!)
- Your memory of every expense you have! Find out where every last penny goes.
4. Get your spending under wraps
Once you have a budget, you’ll start to have a clear picture of where your money really goes (you might shock yourself, I know I do sometimes when all the stuff you’ve spent on comes out of hiding and into the light!) Your budget is a genius way to see your spending habits in black and white, without the guesswork. Don’t be afraid- look these cold, hard truths straight in the eye and start to really have a think as to what you can do without and cut your spending on. Have all your little impulse online buys added up to a hefty sum? Or have you had more nights out on the town than you had realised? Recent research, both of UK and the US households, shows that food and entertainment are increasingly major areas of expenditure. This is an area in which you may have most control, and thus, the easiest place to start doing some trimming. Maybe, just maybe, you could bear to eat out one night less, and hey, why not have the gang over for some good old-fashioned in home entertainment? The most crucial thing about developing your budget is to make sure it’s doable- an unrealistic budget is completely useless.
Tip: Your budget is not written in stone and doesn’t have to be the same every month. Review it monthly and do the necessary tweaks to deal with pending important stuff you know you’ll have to cover. After a few months, you’ll have a basic formula to work with.
5. Put money aside for the big things
It should be no mystery to you the times during the year where you’re going to have out of the ordinary expenses. So significant dates like anniversaries, back to school and celebrations of one kind or another might be top on your list. Fine. You know those dates; why not set aside some money just for those times? Some people find putting cash in different envelopes daily/weekly to be a method that works for them. Why not give it a try? Putting money away at frequent intervals serves as a good visual reminder of what you're doing and is a good way of breaking out of the habit of waiting until the end of the month, to see what’s left over to save; that’s a recipe for disaster!
6. Start chipping away at your debt
Getting out of debt is the sure-fire way to get your finances in order so that, in time, you'll have excess income to spend on things you truly want to. Have a big loan or credit card balance you need to clear? In addition to your stipulated monthly installments, you should be paying more. Make it your resolve never, ever to pay the minimum on an outstanding balance. At that rate, you may be spending a lifetime repaying these debts! Paying on the loan principal is one way to help you get out of debt quicker. If you have multiple debt sources, look at the interest rates applicable on each, which will help you decide which you should prioritise reducing (the one with the highest rate is probably the one you should be focusing most of your ‘over-payment’ on). While you’re clearing debt you have already, work simultaneously on not accumulating more- that’s it, step away from those credit cards.
Taking responsibility for your financial state is something that you won't regret. It may take a while to see the results of all of your efforts, but be patient - the reward will be outstanding. Putting in the time now to look in-depth at your financial health now, and then taking those steps we discussed, is really an investment in yourself. Viewing it in that light will not only motivate you to start today, but will also encourage you to make it a lifelong habit.
Like always, I would love hearing from you, so drop me a comment as to what you think about the article, share your personal experience, or ask a question.