Remember the goal when it comes to your finances… To have enough so you can live comfortably, fulfil your dreams, and not worry about the future.
We talk a lot about personal finance, saving, and investing on our platforms. It’s easy to get distracted by all the ideas you have, but keep the main goal in the back of your mind… It’s all about creating a better future for yourself in the easiest way possible.
Anyone looking to become rich because of material reasons such as status, power, or greed should reconsider their mindset. Because if I know one thing… It’s that shallow goals usually lead to shallow results
For the people that want to improve their personal circumstances and better themselves for the future, here are 7 steps you can take to become more financially free in the next year.
1. Look At Your Current Situation
You want to look at your current income, then your expenses. If your expenses are more than your income you have a problem.
Think about saving money like losing weight. If you want to lose weight, you check your calories and track your exercise. If you consume 3000 calories, but only burn 2000 calories, you are going to gain weight, just like money, if you earn £2000, but spend £3000, you’ll be in £1000 worth of debt.
So, trying to improve your finances without looking up the numbers, is a lot like trying to lose weight without tracking the calories. It is like exercising whenever you feel like it, and eating whatever you want, in the hope of losing weight.
So anyone who has done that before knows you will never lose a single pound because you aren’t tracking your progress in the gym and watching what you eat. The same applies to your finances. You need to be tracking your expenses and income to make sure you are cash positive at the end of most months, so you are not racking up any debt.
You can do this excel or a simple notepad. But I recommend looking back at least 3 months, then carrying on this process after every pay day.
Let’s have a look at an example: Based on the average earnings in the UK.
As you can see most people save on the way towards the holidays then spend a couple of months paying off credit cards, or replenishing savings. This is a good practice, but you need to look closer.
If you are in a cash deficit, you either need to earn more money, or the easier way is to cut some of your expenses.
You need to split up your outgoings into your regular monthly expenses and your luxury expenses. Some regular expenses would include payments such as mortgages, car loans, insurance & utilities. These are expenses you need to pay.
Luxury expenses are things like going to movies, eating high end food & holidays. The more you can cut down on these expenses the better, if you spend more than you earn, the expenses that are not necessary for your existence have to be cut. I’m not saying you have to stay 7 nights a week, and only eat canned beans. You can enjoy yourself!
Getting your expenses in check is crucial to your financial freedom. Without creating a positive cash flow for yourself steps 3-7 are not going to work.
2. Think Before You Spend
This is all about your luxury expenses. If you are struggling to get yourself into a positive cash flow each month, this is the section you need to pay attention to.
Before laying down a wad of cash, or swiping your card, stop and think. Are you getting something you need? Are you getting something that will help you achieve a goal? Or are you buying a status symbol with little purpose other than to compete with your friends?
If you are buying something that you will enjoy and that will improve your quality of life, go for it. But a product you buy for the purpose of just owning it is a frivaless purchase. I’m not talking about essential food and clothes, or even the occasional night out. I’m talking about the £500 jacket you can only wear with those £300 jeans.
Here is a run down of the 4 questions to ask yourself when buying luxuries:
- Can I afford it without using a credit card or overdraft this month?
- Will I use it at least once per week?
- Is it essential to achieving my goals?
- Is this the only chance you will have to buy this?
I would say if the answer to 3 of these 4 questions is ‘yes’, you can make the purchase. But if you answer ‘no’ to any of these when making a purchase, think about why that is, and fix it.
3. Eliminate Bad Debt
Now… Not all debt is bad, but the less you have the better. Things like credit card debt, car loans, and other high interest debt should be your focal point when wanting to pay off outstanding balances.
There are 2 methods you can use to pay off your debt. Pay the highest interest rate off first, or pay the lowest balance first. Look at these examples below:
|American Express||Barclaycard||Bank Auto Loan||Mortgage|
Financially it makes more sense to pay off the debt with the highest interest rate first, but for some people, paying off the lowest balance first gives them a psychological boost, or a sense of accomplishment which pushes them to continue.
I enjoy completing tasks so in my example I would opt to pay off the barclaycard first as it would be the easiest to bring down. Whereas you might look and pay off the American Express card because it’s costing you the most.
The only debt I can understand not paying off immediately are loans such as, your mortgage, any student debt you have, or a low interest express loan typically under 5%.
The main thing is, it doesn’t make sense to invest your money earning an average 8% in the stock market, when you have a 11% car loan you need to pay off.
Take the example above, it would be better to pay off the American Express credit card first, then move onto the Barclaycard and so on. But it will be easier to pay off the Barclaycard quicker, hence reducing your interest payments quicker. If it will take you longer than a year to pay off any of these, start with the highest interest rate.
4. Build Your Emergency Fund
Most financial advisors will say your emergency fund should be enough to cover your expense for 6 months if all of your income suddenly stopped. For a lot of people this might take years to achieve and is quite overwhelming.
That’s why I’m encouraging you to save £1,000. This will be enough to cover most unexpected expenses such as car trouble or any accidents. Once you have £1,000 saved it will be easier to build on that amount.
These savings should be put in a separate bank account, possibly with a different bank that you have your current account with. This is not a general savings that you can use for holidays or nights out on the town, you must not touch this money unless you have no other option.
5. Invest Via A Workplace Or Private Pension
Your future self will thank you for what you are about to do. As an employed person in the UK, you should be given the opportunity to join a workplace pension if you meet the criteria set by the pension regulator.
As of the 19/20 tax year, this means you pay a minimum of 5% of your post tax salary into a pension fund, and your employer contributes 3%. If you are not already enrolled into a workplace pension you should contact your employer and start contributing. You can also increase your contribution if you want to pay in more.
For self employed people you need to open a private pension. Not only does this come with nice tax benefits, it also allows you to plan for your future. You can contribute up to £40,000 per year into a private pension.
Anyone can contribute into a private pension and I would highly recommend it either through an online account, or high street broker such as St James’ Place.
6. Invest In Yourself
There is a lot you can do with £100 in 2020. You could start a side hustle, invest in the stock market, trade forex, the list goes on.
You could also invest in something that will keep your spirits up. I know I said don’t go out and buy unneeded stuff, but if you save every penny you have and don’t treat yourself you’ll go mad. So spend a night at the movies, or buy the designer jacket, but only if it’s for you, and your enjoyment.
7. Work Out How Much You’re Worth And Get It
Here’s the thing… Your time is worth money, if you know how to use it.
Say you work in a supermarket and get paid £9/hour, your time is worth £9. But if you can find something, whether it be a new job, a business you want to develop, or a simple online hustle that will pay you more than £9/hour why don’t you take it.
You can massively increase your income by learning a new skill or developing a business. Yes you might not see any revenue for the first couple of months or even years, but once your effort materialises, your hourly income can increase infinitely.
If you are good at something, or have an idea, write down how you would spend your time developing that idea, or working on the problem you are good at. Then have a look at the resources you’ve used, how much time it took you, and what expertise you used to complete it. Once you have the data, you can then start to calculate how much you want to be paid for this work, then it’s a case of going to find someone to pay you.
And here is a Step By Step Guide To Writing A Business Plan!
What To Watch Out For
I know it sounds simple… Save, invest, rewards, repeat. But you need to be careful not to follow ‘Internet Gurus’ who just want your money. These people promise the world and can lead you down the wrong path.
Stick to what you know and stay away from ‘Super Quick Money Making Schemes’. Building your wealth takes time, and if you play it right, that could take less than a year!
Also… Have fun once in a while, you don’t have to stay in every weekend!
If you have any questions or would like some help with your financial goals don’t hesitate to contact our team. We are here to help!
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