By John Manyike
January often brings a financial crunch, as holiday spending leaves pockets empty, and unpaid bills start piling up.
Crafting a list of New Year’s resolutions has been a common approach to ‘making things better for the year ahead. However, resolutions can be challenging due to our tendency to set overly rigid rules for ourselves. We often adhere to these resolutions briefly before reverting to old habits. Keeping your financial resolutions simple and having as few as possible makes success possible.
Five fundamental financial planning strategies can have a profound impact on your life. Incorporating these principles into your resolutions can make 2024 a significantly smoother year financially.
The first resolution should be to reduce spending and increase savings. A budget is essential for achieving this goal. Adopting the 50:30:20 budgeting can be an effective approach This guideline allocates:
- 50% of your income to Needs: This portion covers essential and fixed expenses.
- 30% to Wants: This portion focuses on non-essential lifestyle spending.
- 20% to Savings: This portion helps build a financial cushion for the future and supports your financial goals.
Using this guideline as a framework and adjusting the ratios as needed can help you stay on track.
While reducing spending may seem daunting, it can be achieved by identifying and eliminating small, everyday expenses that often go unnoticed. By tracking your daily spending patterns, you may be surprised to discover that these seemingly insignificant purchases add up to a substantial amount over time. For instance, if you spend R30 on small items every day, it translates to R150 per week, R 600 per month, and a staggering R6 600 annually. By identifying and eliminating these unnecessary expenses, you can improve your financial well-being.
The second objective is to reduce debt. Start by understanding your spending patterns and identifying areas where you can cut back:
- Close unnecessary accounts: cancel credit cards and store cards that are not essential for your daily purchases if you struggle with discipline. This will help you avoid impulsive spending and stay focused on your debt repayment goals.
- Prioritise high-interest debt: Create a list of your debts, starting with those carrying high-interest rates such as credit cards. Allocate extra funds towards paying off these high-interest debts first. As you settle each debt, you’ll free up more money to tackle the remaining ones.
- Don’t fund entertainment with credit.
- Consider debt consolidation: If your debt is substantial, explore debt consolidation options with your lender. This can simplify your repayment process and potentially lower your overall interest rate.
Maintain financial discipline Remember, debt consolidation is not a licence to increase spending or take on new debts. Close unnecessary accounts, avoid impulsive spending, and stay committed to your budget.
Seek professional guidance: If overwhelmed by your debts, consider seeking assistance from a qualified debt counsellor. They can provide personalized guidance and support to help you develop a manageable debt repayment plan. The third resolution is to distinguish between wants and needs. Recognise that what you desire may not always be essential. For instance, you may need a car for transportation, but the top-of-the-range model might be a want rather than a need. By opting for a more affordable model or considering a used car, you can save a lot of money.
Purchasing luxury retail items through installment plans can be a costly attempt, especially with interest rates hovering around 21%. Consider saving for desired items instead. Often you may find that the desire for the item diminishes once you have the funds.
The fundamental principle of financial management is that if an offer appears too good to be true, it likely is.
It’s unfortunate that people seeking financial success often fall prey to unrealistic promises that lead to disappointment. Steer clear of any investment scheme that offers abnormally high-interest rates or unrealistic returns on your money. Your fourth resolution should be to stick to reputable financial institutions for your investments.
Finally, there’s one resolution that could have a life-altering impact on you and your family.
As we transition through life’s stages, from our first jobs to retirement, having a trusted financial adviser can be invaluable. Their expertise can guide you in structuring savings, investments, and long-term financial planning, ensuring you build a lasting legacy for your family.”
As with all financial endeavours, swiftly translating your resolutions into action is the cornerstone of achieving prosperity.
* Manyike is the head of financial education at Old Mutual.
PERSONAL FINANCE