29th December 2016
Nothing brings forth the desire for self-improvement like an approaching new year. And personal finances are a common topic for those searching for resolution inspiration. So, if you are interested in improving your financial situation during 2017, try these New Year’s Resolutions on for size.
If all you know for sure is that your financial situation needs help, then this is the resolution for you. The first step to solving any personal finance problem is facing your current situation directly. Get all of your account documents together, including debts and assets, and organize the information. Use a method that suits your preferences. Some people favour spreadsheets or other tracking software, while others prefer putting pen to paper.
Once you have records regarding what you have and what you owe, you can create a plan to improve the management of your finances into the future.
Many people jump to resolutions regarding paying off debt. However, a key to getting rid of debt is to avoid taking more on. Instead of focusing the amount attributed to each debt, start by making all required payments and not increasing any balances. Additionally, don’t apply for any new sources of credit.
If you can meet your repayment obligations and otherwise make ends meet, consider that a great start to improving your financial situation.
Anyone without suitable emergency savings needs to put funds towards meeting that need before accelerating debt repayment. If you don’t have savings, you won’t have the cash available to handle even small financial emergencies. Aim to collect at least a few hundred pounds into a reasonably accessible savings account. Only after that should debt repayment be a priority.
Once you stop using credit and have some money in savings, now you can focus extra funds on debt repayment. There are two traditional approaches to creating debt repayment plans: the Debt Snowball and the Debt Avalanche.
The Debt Snowball Method, popularized by personal finance guru Dave Ramsey, focuses on paying off the debt with the smallest balance first. Then, the next lowest balance is targeted for repayment. The idea is to build momentum through obtaining some quick wins along your repayment journey to help keep you motivated.
The Debt Avalanche Method focuses on repaying the debt with the highest interest rate first. Then, once the first debt is repaid, the next debt with the highest interest rate becomes the new target. This approach saves money in the long run, as the total amount of interest owed throughout the life of all of your debts is lower than the snowball approach. However, it can take longer to obtain that first win depending on the amount owed on your highest interest debt.
Whichever process you choose, just continue prioritizing the next debt based on either the balance or interest rate. Once the last debt is repaid, the process is complete.
After getting out of debt, it feels as though there isn’t much else to do. However, here is where you can really get your financial future on stable ground. Increase your available savings until you have at least six months of expenses covered. Once you reach that amount, consider options for investing your money to create additional income.
Your exact strategy from this point forward will vary depending on your risk tolerance (in terms of investing and savings) as well as any large purchases you see in your future. Instead of resulting to credit, try to save enough in cash to pay for what you need. Or, if you do use credit, begin your Debt Snowball or Debt Avalanche again until you are once again debt free.
This is a resolution you can maintain indefinitely and is certainly a great one to carry forward year after year to ensure your financial house remains in order for this New Year and everyone after.