Different cultures across the world have their own special ways to mark the coming of the New Year. But, wherever we’re from, many of us will want to take this as an opportunity to make a new start—whether that’s planning a career change, embracing a healthy lifestyle, or improving our finances.
If you’d like to lay the foundations for financial success, this is the guide for you. We’ll look at some key steps to take when planning your budget in the months to come.
1. Know your spending habits
There’s no better time than the dawn of a New Year to sit down and take stock of exactly how much has been leaving your account every month. The trick with working out your spending is to be as forensic as possible.
Rather than trying to estimate your spending, you’ll want to use hard data. A good online banking app can come in very useful, as it should let you look back and chart exactly how much you spend on:
- Home utility bills
- Phone and broadband bills
- Debt repayments
- Gas (petrol) and/or public transport
- Home, car and other insurance policies
- Groceries
- Clothing
- Entertainment expenses
This will give you the most accurate picture possible of what your outgoings are. Don’t forget to include infrequent payments in this overview.
Buying new furniture, getting school clothes for your kids, or paying for eyeglasses, for example, may not have come up in your most recent bank statements.
Now, you’ll be ready to work out a better budget going forwards, including how much you should save, using something known as the 50/30/20 rule.
We’ll look at that in more detail shortly, but first, there’s an important point to address to improve your finances.
2. Prioritize debts to improve your finances
When you make a New Year’s resolution to improve your finances, it’s tempting to think about savings. But first, look at any debts.
That’s because the interest you’ll have to pay on, say, loans or credit card debts will probably be more than any interest you might gain from money you put into a savings account.
So, rather than setting aside a proportion of your earnings for savings each month, it may make better financial sense to use that money to pay off expensive debts first.
Once those are taken care of, you can focus on building up your finances from a solid foundation.
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3. Budget wisely
Now it’s time to calculate your budget. How much should you spend on various aspects of your life, and how much should you save?
That’s a question that can make many of us scratch our heads, but this is where the 50/30/20 rule comes into play. It’s a well-known budgeting strategy that divides your post-tax monthly income into three spending components:
- 50% on ‘needs’, such as your rent, bills, and financial support to loved ones
- 30% on ‘wants’, such as going to bars and restaurants, paying for an upgraded laptop, and having a Netflix subscription
- 20% on savings (or paying off debt)
Let’s say you’re living in the UK and your post-tax monthly income is £1,300. You should therefore aim to spend:
- £650 on needs
- £390 on wants
- £260 on savings or debt
Obviously, these percentages aren’t set in stone for everybody, and you can adapt them to meet your particular circumstances.
If your salary fluctuates, you can simply take an average of the past three months and apply the percentages to that amount. But these general parameters can give you an idea of how to tweak your spending to allow you to meet your target for savings.
If you’re currently spending too much on ‘wants’, for example, you might try cutting down how many takeaways you order per month, or put a streaming subscription on pause.
4. Work out your savings goals
To make your money really work for you, you’ll need to find the best possible savings account. Banks offer different savings accounts which pay out at different interest rates, so it pays to sit down and take your time comparing the options available, and what’s right for you.
Consider your savings goals, and whether they’re short or long term.
Do you want a safe place to build an emergency fund? Improve your finances? Are you saving for a big event soon, such as a trip to a friend’s wedding? Or are you saving for a longer-term goal, like a down payment for a house? These factors will determine the account you should open.
Some savings accounts work rather like ordinary current accounts, allowing you to withdraw money whenever you want to. The interest yield is likely to be far smaller with these kinds of accounts. Still, they may be a good choice if you expect to require funds soon, such as for a holiday, or if you want this to be your emergency fund.
You may prefer a savings account where your money is effectively locked away for a set period—for example, two years. They tend to offer higher interest payments, but withdrawals will either be impossible or come with fees. This kind of account is ideal if you’re setting money aside for a bigger investment later on.
5. Stay savvy about essential spending
It’s easy to spend more than you need to, even for essentials. Stay savvy by looking for where you can make even the smallest savings to improve your finances.
Take food, for example.
Buying branded products can rack up far higher grocery bills than sticking to shop’s own-brand items, which are often every bit as good. And, if you’re currently paying off your credit card, you may be able to lessen the sting of high-interest payments by transferring your full balance to another card offering 0% interest for an extended period.
If you’ve moved to work and live in a new country, it may be essential to set aside some of your income to support loved ones back home.
In which case, you can help save more by using a money transfer company like Remitly, which is committed to providing low transfer fees and highly competitive exchange rates with every remittance you make.
Every measure you make to cut costs, whether with your daily shopping or sending money to the people you love, can help make a real difference to your financial status this year and beyond.
Further Reading: Spring Cleaning with Your Finances: 3 Steps for a Fresh Start