2021 is finally here and now could be a great time to take control of your finances. So, whether you’re ringing in the new year with a clear head or with a financial hangover, here’s what you could do to get your finances in shape this year.
Review your spending
If you want to get your finances in order, it’s important to spot the unhealthy habits that are harming your financial health. A good way to do this is to review all your monthly outgoings, including expenses and leisure spending. Also, when looking at your spending, make sure you ask yourself the right questions:
- ‘How much do I spend a month on non-essentials?’
- ‘How often do I buy on impulse?’
- ‘What could I cut down on?’
Managing your finances efficiently requires you to know where your money goes. It’s only when you understand your spending habits that you can start applying strategies to improve your financial situation. So have a try and check your spending habits – it could seriously lead to a light-bulb moment!
Consider paying off debt
To achieve financial wellness, it could be a good idea to pay off your debt. Borrowing money can be very expensive and paying interest to the bank every month could make your financial life harder. You may need to cut back on fun spending and put more money aside, but remember, every pound you pay off is a pound you won’t have to pay any more interest on, making you one step closer to financial freedom!
Set specific and realistic goals
Having goals is key if you want to take control of your finances, however, not all goals are good – some are too vague, and others are utterly unrealistic. And with the wrong goals, reaching financial wellbeing could be quite complicated. So, make sure you have a think about what you really want to achieve and then set goals that are both specific and realistic. For example, instead of saying ‘I want to save more’, try ‘I’ll save £20 at the start of each month’. Setting the right financial goals for yourself will help create an effective plan of action and let you easily track your progress.
Now a good way to get your finances in shape is to create a budget and stick to it. Think of it as going on a diet, without a detailed plan, you’d struggle to lose weight. Well, it’s the same with your finances. If you don’t plan ahead, you could find it hard to reach your goals and turn your dreams into reality. So, where do you start? Well, remember to list your monthly expenses. Then, look at your disposable income. How much is left after everything is paid for? Once you have an estimate, it’s time to budget and decide how you’re going to use your disposable income. How much will you be spending on groceries? How much money do you want to put aside? How much will you be using for leisure activities? To make your predictions, you may want to check your old bank statements as they could give you a rough idea of your spending. But don’t worry, if you don’t get it right the first time, you can adjust your plan until you find the right formula. And when you’re satisfied with your budget, try to stick to it as long as you can – reaching financial success is something that requires long-term commitment and discipline.
Earn extra money
Earning more money is usually a good idea if you want to achieve financial wellness. So, if you’ve got time, why not start a side hustle? It could be anything, from taking part in surveys and finding a second job, to starting a new project or selling some of your stuff online – it’s really up to you. Getting some extra cash could help boost your finances, and as a result, you could be in a better position to save.
Shop around and haggle
If you don’t have time to start a side hustle, then you may want to reduce your spending, and a way to do this is to shop around and haggle. Take your energy bill for example. Are you sure you’re not paying too much? It could pay off to have a look at other providers and compare what they offer – you may well find something cheaper. Similarly, when it comes to big purchases, like getting a car, it’s often good practice to haggle. It can feel a bit awkward to try and negotiate a price, but if it works, you could be saving some cash.
Consider building up an emergency fund
If anything, 2020 taught us that it’s important to plan for the unexpected. And a good thing to do for your future self is have an emergency fund in case anything happens. Say you lose your job, you’d be reassured to know that you’ve got an emergency fund you can use during these difficult times. It’s often recommended to save three to six months’ worth of living expenses - but obviously, not everybody is able to tuck away that much money. That’s completely fine if you can’t save large lump sums, as long as you put whatever you can afford aside on a regular basis – saving small and often is also a great way to build up a decent emergency fund.
Make saving a priority
When it comes to managing your finances, saving should be treated as a priority, not an option. We understand it’s not always easy to put money aside, but you don’t have to save huge amounts if you can’t afford it. In fact, it’s possible to end up with a good pot with small sums saved regularly. For instance, by putting £50 away every month, you would save a total of £600 after 12 months, and £1,200 after 24 months – not bad! Now, the difficult thing is to get started and remember to add money to your savings account. If you’re not good at remembering things, perhaps you could automate the process by setting up a Direct Debit, that way, you don’t have to worry about forgetting.
Putting money in a savings account could be a good thing to do since you’re guaranteed returns, but over a number of years, as the cost of life increases, the real value of your savings may be decreasing. If you’re pursuing long-term growth, your money should grow at least at the same pace as everything else, and the issue with saving is that interest rates can often fall below the rate of inflation (the general increase in prices). So, it could be worth considering other options to make your money work hard. And it’s where investing can help!
With investing, returns aren’t guaranteed, and you could end up with less than you initially put in. However, since your profits aren’t tied to any fixed interest, there’s also a chance you could get higher returns. In fact, over the long-term, that’s what investing tends to do. People who invested in the UK market, the FTSE 100, for any 10-year period between 1986 and 2019, have had an 89% of making a gain1. And that’s not all! Looking at the annualised returns of the index, you’ll notice that they tend to exceed the rate of inflation. Between 1983 and 2020, the average inflation rate (RPI) in the UK was 3.4%2 and for the same period, the FTSE 100 returned about 6.2% a year (with re-invested dividends)3 – which sits well above inflation.
If you’re ready to invest and want to maximise your journey, it could be a good idea to look into Stocks and Shares ISAs. Why, you ask? Well, with a Stocks and Shares ISA, also known as Investment ISA, you don’t need to pay tax on your profits, meaning you get to keep more of your potential returns. Each tax year, you can invest up to £20,000 tax-efficiently (subject to change) – this is your ISA allowance and you have until midnight on the 5th April to use it, or you’ll lose it forever. Investing in an ISA could be a great way to boost your finances and reach your goals.
Think about your pension
If you want to get your finances in a better place, it could be worth thinking about your retirement and reviewing the options you’ve got for it. If you’re working, you should be able to claim a state pension and you should be enrolled into a workplace pension – make sure you keep an eye on them as they’ll contribute to your retirement income. Now, these aren’t the only types of pension you can have - and you can learn the main differences between each pension in our handy guide. If your financial situation allows it, you may find it useful to open a personal pension, or SIPP (Self-Invested Personal Pension).
With a personal pension, not only can you choose how much you put in, you’ll also receive a 20% tax relief on each contribution you make. Say you’re a basic rate taxpayer and you decide to open a personal pension where you put £800. The government should top up your pot with an extra £200, bringing your pot to £1,000. Now if you do the maths, you’ll quickly realise that £200 is 25% of £800, which means you effectively receive a 25% uplift on each contribution you make. One thing to note is that the amount you get tax relief on is limited to £40,000 a year, or 100% of your earnings if they’re lower – this is your pension allowance and it includes contributions made by you and the government.
It’s often assumed that opening a pension is hard work, but it doesn’t have to be. With robo-investing platforms, like Wealthify, it takes just a few minutes to get started. You simply need to choose how much you want to put in – with Wealthify, you can start with just £50. Then, you get to select the risk level that suits you – you can be Cautious, Adventurous, or somewhere in between. We’ll do the rest, from picking the right mix of investments to managing your pension on an ongoing basis.
1: Data from Bloomberg
3: Data from Bloomberg
Past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.