Deciding on a New Year’s Resolution can be tough and while it’s tempting to overhaul your diet or vow to exercise daily, there’s an alternative option that doesn’t involve skipping dessert or running in the freezing cold – a financial detox.
This may sound like a daunting process but future-proofing your finances can be broken down into manageable steps and will also have a positive impact on your overall mindset.
“The pressures, worries and anxiety that are caused by falling behind in management of finances often results in a negative effect on mental health,” explains Natalie Montgomery, founder of Almara Consulting Group. “Financial detoxing will allow you to have a fresh perspective of your current circumstances.”
If you’re not sure where to start then don’t worry. From reviewing where you stand to planning for the future, here’s how to kickstart 2021 with a money detox.
Take stock of your finances
While it can feel scary, knowing exactly where you stand is key to creating a manageable plan. Thankfully, there are plenty of online tools to help and Montgomery suggests kicking things off by finding a simple cash flow spreadsheet online, explaining: “We set ourselves up to succeed financially by ensuring we know where our money is going before it gets there.”
“Pay attention to monthly expenses such as gym memberships and subscriptions”, advises Rosie Hooper, financial planner, “as these seemingly small figures soon add up”. She adds, “now is the time to reassess and make sure you’re getting your money’s worth with all the services you’re paying for.“
You can also begin to evaluate your irregular outgoings, such as clothes shopping or meals out with friends. And while 2020 has had a lot of downsides, Hooper points out that it has given many of us the chance to see where we previously spent money unnecessarily – or as she puts it, “leaked” cash.
“This is the best year that we’ve ever had for people to realise where they, quite frankly, waste their money,” she explains. “It’s like, ‘why was buying that cup of coffee and then quickly buying that lunch?’ because we haven’t been going into town, we’ve not been buying lunches out.
“This is money you are literally just leaking and you’re not getting any value from it.”
Understanding your credit rating
The second step in taking stock of your finances is checking your credit rating, which you can do online in minutes, for free.
There are three approved agencies you can use to check your score: Experian, Equifax or TransUnion. Each of these will perform what is known as a “soft check” on your file, which essentially means they’ll assess your rating without letting any lenders know you’ve looked (as sometimes checking your score regularly can work against you). When your report is generated, you’ll receive a numerical score and brief overview of how it was calculated.
In order to build your score, making sure your bank is aware of any house moves and getting yourself on the electoral register. You can also prove that you’re financially responsible by making regular payments reliably and keeping on top of any debt by making the minimum repayments.
Understanding your credit rating might not feel important right now but your current spending could have a long-term impact and affect your ability to borrow money or secure a mortgage in the future.
Set a financial goal
Perhaps you’d like to clear a chunk of debt or save up for a weekend away with mates – what you do with your hard-earned cash is entirely up to you. Don’t worry too much about how ambitious you’re being either, it’s more important to be realistic and set an achievable goal to work towards.
“This will enable you to have a clear vision on how much you should be aiming to save each month throughout 2021 and what you intend on doing with your savings,” Montgomery says.
The all-important budget
Once you’ve assessed your outgoings and decided on what to aim for, it’s time to build a budget that will help you meet your money goals. Crack out the cashflow spreadsheet again and make a plan for how much you’d like to spend and save each month.
Rather than seeing this a slightly tedious exercise in setting limits, Hooper suggests rethinking the activity. “I know some people think having a budget is restrictive but it’s not about restricting what you spend, it’s about having visibility,” she says. “There’s a key difference between restricting and visibility. If I know, I’m spending £250 on a Gucci belt and I love it, and I’m getting the value, I’m fine with that. But you need to be consciously aware of where you waste your money.”
Putting aside savings each month – no matter how small – is also key. “Saving is a routine,” she says. “It’s a habit [and] you’ve got to make yourself do it.”
Give yourself room for changes
While your budget should be realistic, it’s not uncommon to find your spending plans are a little too tough to stick to and real-life also often throws curveballs you couldn’t have predicted.
If you find yourself struggling, don’t panic. Montgomery recommends regularly setting aside a little time for an honest reassessment of your outgoings.
“Even though their intentions are in the right place, many people do not meet their budgeting goals because after they create their plan, they do not take adequate time periodically throughout the year to review [it],” she says. “Review your budget plan once a month – set yourself a recurring reminder in your calendar!”
Where to stash your savings
You’ve created the budget, adjusted it monthly and managed to set aside the extra cash… so now what? Where you decide to keep your savings will depend on what you’re planning to spend the money on but where your savings are kept separate from the funds used for day-to-day spending, is a good place to start.
Montgomery also suggests trying to put some of your extra cash into a longer-term pot with an Individual Savings Account (ISA), adding: “Ensure you carry out thorough research on these to find which type will be the right fit for you.”