A new year comes with a mixed bag of emotions, challenges and opportunities. For most people, it’s usually a time to embrace healthy living habits and shed off the extra pounds gained over the festive season. Many others resolve to chase a new career, relocate to another city or country, pursue further studies, or learn something exciting.
A new year is also a perfect time to reorganize your personal finances and make big strides towards attaining financial freedom. In truth, getting personal finances on track is one of the most popular New Year’s resolutions but also the most broken. Many people set unrealistic or unattainable financial goals or they simply aren’t disciplined enough to stick to them.
This article puts together a list of practical tips that will help you manage your finances prudently and enhance your chances of having a successful financial year.
1. Track Your Spending
If you want to get hold of your finances, knowing exactly where your money goes, and how much goes where is a good place to start. Here are some tips to help you track your spending:
Monitor the Major Bills
Major bills like mortgage/rent, car loans, energy, internet, cable television, water, and insurance take up a good chunk of our paychecks. Since these payments are often automated, it’s easy to lose track of just how much money is flying out of your account to settle the bills. For instance, with automated electricity bill payments, you will hardly know the exact amount of money you are spending to power up your home or office. Consequently, you won’t be able to regulate your energy consumption to keep bills down. Even payment automation service providers can sneak in service charges without your knowledge.
Make a List of Little Expenses
While major bills burn through the money in your bank account, little expenses such as ice cream purchases and parking fees eat up your pocket change. Keep a diary where you can note down all these little expenses. At the end of month, you will be able to put a finger on your total out-of-pocket expenses, as well as detect the little bad habits that are costing you money.
Monitor Big Ticket Expenses
Note down how much money you spend on big ticket (high-value) items such as designer bags, home entertainment systems, kitchen appliances and telecommunication devices.
Generally speaking, make it a primary objective to follow your money trail and account for every penny that leaves your pocket in the New Year. You can then review your monthly expenses to know the exact amount of money you are spending on various items and adjust your consumption habits accordingly.
A document used to record your daily expenses.
2. Embrace Frugal Living
Let’s face it, many people are living on monthly paychecks, credit cards and bank loans. Even folks who are earning six figures a month are living paycheck to paycheck. The primary reason many people struggle to make their money work for them isn’t because they don’t earn enough, but because they live beyond their means: renting pricey apartments, taking costly vacations, throwing extravagant birthday and anniversary parties, dining in expensive restaurants regularly, securing loans to buy luxury or executive cars, and so forth.
Embracing a frugal lifestyle could just be what you need to finally achieve financial freedom. Really, what’s the point of driving an expensive car yet your rainy-day fund isn’t even sufficient to cover your bills for six months if you suddenly lose your job?
Let the New Year be a year of frugality. Begin by auditing your current lifestyle to dig out habits that you can do away with. For instance, if you are spending too much money on parking fees, embrace alternative commuting means, like bicycling or carpooling to work. Drop unnecessary subscriptions. If housing is expensive, how about moving in with a coworker to save money on rent? If you want to take a deserved break from work, how about finding a good vacation spot in your country instead of jetting off to an exotic overseas destination?
It is important to note that frugal living doesn’t mean you stop spending money on the things that make your life enjoyable. It’s about cutting back on unnecessary expenses, saving for big ticket items instead of buying them on impulse, and – most essentially – living within your means.
3. Open a Savings Account (And Make Good Use of It)
A quick look on individual savings accounts statistics reveals a grim picture. In the UK, for instance, only 12.7 million adults (roughly 30 percent of the adult population) had an active savings account in the 2015-16 year, according to an H&M Revenue and Customs report.
If you don’t have a savings account, you shouldn’t begin the New Year without one. It is an ideal tool for putting some money aside for emergencies, large purchases, retirement, or further education, and it can help you to develop a habit of saving. Here are some of the factors to consider before opening an account:
Interest rates for savings accounts vary among financial institutions. Shop around for one that offers the best rate. In general, to earn more interest on your savings, you will need to save more money over a fixed period of time.
Ease of Access
Banks typically restrict the number of times and amount of money you can withdraw from your savings accounts. If you withdraw beyond the limit, you may lose your accrued interest. Be sure to choose a bank that allows you to access your funds whenever you need to without incurring a hefty penalty.
Ensure the account is insured, so that you don’t lose your savings if the bank collapses.
After opening an account, start saving immediately, however little. As you trim your budget and the amount of disposable income increases, you can gradually increase the amount of money you save. To avoid the hassle that comes with personally making regular deposits into your savings account, you can authorize your bank to automatically transfer a fixed amount of money from your checking or salary account to your savings account every month.
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4. Pay off Your Debt
Being in debt not only takes away your financial freedom but it can also have devastating emotional effects, such as anxiety and depression. However, no amount of counseling can help you fully regain your financial freedom and feel positive about yourself again. Paying off all your debts is the only sure cure.
The New Year is an ideal time to draw and implement a plan to clear your debts or substantially reduce them. One of the most effective ways to climb out of a hole of debt is to list all your outstanding debts and identify the ones that need to be paid off urgently. Prioritize large debts with high interest rates and increase the frequency of your repayments. If there is a loan you can clear off sooner without overstretching yourself, do it. If you have several credit card loans, consider consolidating the balances into a single card with the lowest interest rate, and then start paying it off. Credit card companies typically offer periodic balance transfer offers, so be on the lookout and make the most of it.
Also, you can reach out to your lenders and ask them to lower or forgive your debt altogether. It may sound impossible, but it does happen, especially if you can provide a compelling reason. Some lenders would rather recover a portion of a loan than risk losing everything.
5. Build Your Credit Rating
Even though debt is not desirable, sometimes it’s the only way to get out of emergency situations. But without a good credit rating, securing a loan can be a difficult task. It is, therefore, very important to focus on building your credit score throughout the New Year. Pay off existing debts, clear your bills on time, cancel unused credit cards, ensure your card reports are accurate, and cut off financial associations with people with poor credit ratings. It’s also helpful to maintain your residential address, since lenders feel more confident lending money to people who don’t switch homes often.
6. Plan Your Estate
Personal financial planning largely involves thinking about your future, as well as that of your family. This is why estate planning – the process of organizing for the management of your assets in anticipation of mental incapacitation or death – should be a vital part of your financial plan in the New Year, regardless of how much wealth you have accumulated. It will save your family unnecessary legal battles over who inherits your properties.
Consult an attorney or estate planner to analyze your wealth situation and advise you on how to plan your estate properly. While planning, focus on minimizing the costs of transferring property and ensure none of your assets is left undesignated to a beneficiary, and choose competent executors. You can always update your estate plan by listing changes in your trust or will.
7. Read about Money (Get Inspired)
Financial information is important. Sometimes we commit personal finance crimes simply because we lack the knowledge to make better decisions. In the New Year, develop a passion for reading about money. If you are in debt, read about the personal experiences of people who were in a similar situation and, where relevant, adopt their debt management strategies. Even when your finances are shaping up nicely, don’t stop reading. There is always something new to learn. In addition to reading, watch money talk shows, listen to podcasts, and follow reputable personal finance advisors on social media channels to gain the motivation and inspiration you need to turn your personal finances around.
Getting your personal finances in order is the first step to living a fulfilling, stress-free life. Evaluate the financial mistakes you have made in the past years, learn from them, put these tips into practice, and let the New Year mark the beginning of your journey to financial success. You can do it!
Do you have anything you’d like to add? Join the conversation below!
Family Financial Statement
A document used to record your finances including income, monthly expenses and assets when planning to purchase a house.