Most of us will be delighted to see the end of 2020. It was a difficult year in so many ways. We’re all hoping that 2021 turns out to be a much better year in every way, even though it has not got off to the best of starts...
New Year usually feels like a good time to make a fresh start. Recent research indicates that most people do still make New Year’s resolutions. 2021 appears to be no different in spite of everything else that is happening. The most popular resolution for 2021 is - as always - to lose weight and exercise more. But this year, a very close second is to save money and get out of debt. Almost a quarter of people making resolutions want to do this.
But is it really possible to turn your finances around? Especially in the current circumstances, where we are once again in lockdown. You may well be facing some huge financial challenges right now and your main priority is just to survive the next few months.
In our next article we will take a look at what kind of additional financial help is available to you throughout lockdown and beyond. But, whatever your current situation, the following five steps could help you to make a new financial start in 2021.
1. Know where you stand
Finances are all about numbers. Just making a resolution and hoping for the best will not get you anywhere unless you are prepared to look at the numbers and make changes where needed. This will take some time, effort and determination but will be well worth it.
The first thing you need to do is to look at all your financial information and make two lists. The first list should include all the money that you have: bank account, savings, investments. Anything and everything. The second list should have all the money that you owe, including overdrafts, loans and credit cards.
Making your lists will give you a quick overview of your financial situation. How much money you have, and how much money you owe. Facing up to reality can be the hardest part of sorting out your finances. If the numbers don’t look good, you may feel like giving up at this point. But don’t. The first step in sorting out any problem is understanding all the facts. You are then in a position to start taking action.
2. Start paying off debts
The best thing you can do to make a fresh financial start is to start paying off your debts. Carrying debt is very stressful, and can affect you in all kinds of ways. If you add up all your monthly debt repayments you will see how much your existing debt is impacting on your financial health. Imagine if you had no debt repayments but could use that money for other things instead?
If your finances are being impacted by Covid-19, it may seem impossible to envisage being able to pay off any of your debts in 2021. Surviving is your main priority right now. But later this year you will hopefully be in a stronger financial position, and can begin the challenge of paying off your debts little by little.
When tackling debt, if you have any money in savings it is a good idea to consider using some of this to start paying off debts. Interest rates on savings are low at the moment, so your money would be better used to get rid of some of your debt. If you are currently only making minimum repayments on your debts, particularly credit cards, the amount you owe will continue to grow because of the interest you are being charged.
Once you have paid off your debts, you will have more money available each month, and can start saving again.
What some people have found helpful is to “snowball” their debts. Pick one debt, perhaps either the smallest or the one with the highest rate of interest. Then do everything you can to pay that debt off. Once you have cleared that debt, don’t let up, but transfer your effort and money into clearing the next debt. And so on.
If you have a lot of small debts, it may also be worth considering a debt consolidation loan. Taking out a new loan would not increase your overall amount of debt, but combine it all into one single debt instead. You would then have just one monthly payment to make, and could put all your effort and energy into paying that off.
If this is an option that may be of interest then do get in touch with us at Fair Finance. Even if your credit score is currently not good, we may still be able to help. We offer a range of loans, including bad credit personal loans, that you could use to pay off existing debts and wipe the slate clean. Note that we will only consolidate debts if they have a higher interest rate than that of our loans, to make sure that you save money. So we typically won’t be able to consolidate debts from credit card and bank loans, which typically carry a lower interest rate.
3. Make a budget
One key factor in getting to grips with your debts is knowing where your money is going. It can be very easy to slide into debt without really understanding why. It is very disheartening if you are doing your very best to pay things off, but still end up maxing out your overdraft at the end of every month.
The only way to get your regular finances under control is to make a monthly budget and stick to it. You need to understand where your money is going, and make the necessary changes in your lifestyle and spending patterns to ensure you don’t overspend. Your budget needs to be realistic - you have to live after all - but also challenging. You need to be as strict as you can with anything to do with spending money.
We look at this topic in more detail in our article How to make a budget and stick to it. It is worth taking the time to read this article and follow the steps to set up a budget. If you can do this, it could revolutionise your financial habits for good.
4. Build some savings
We suggested earlier that you use any existing savings to pay off debts, and this makes financial sense. But you do then need to build up some savings again as soon as you are able to.
If possible, you want to build up enough savings that could help you and your family survive for at least three months if everything else went wrong. We can all identify with this after all that has happened since the pandemic began.
It’s also good to have money available for other emergencies, such as replacing or repairing domestic appliances, medical or dental treatment, vets bills or, sadly, funeral expenses. This will avoid you getting into debt again when these life events happen.
Even if you have no savings at all at the moment, anything is better than nothing. If you can’t afford to save much right now, start small. Here are three ways that might help you to save:
- Open a new bank or savings account, ideally one that does not have instant access to your money, and set up a direct debit to pay something into it each month. Treat this direct debit just like any other bill. Even if you start with a very small amount, it will gradually begin to add up.
- If you receive any unexpected money, for example a gift or a win, put half of that money into your savings account. Whether it’s a large amount or very small, everything helps.
- Have a cash savings jar and put something in regularly. For example you could put in either a fixed amount, or any loose change, every day or once a week. Or if you make a conscious decision not to buy something eg a coffee or a drink or a magazine, then put that money into the jar instead. Every month transfer the cash from the jar into your savings account.
These small steps are easy to do, but can help ease you into the savings habit, and gradually begin to build up some savings for you.
5. Keep going
It takes time for new habits to take root and become part of your way of life. Financial habits are no different. You will need to keep going with all the above steps to make a fresh start and turn your finances round in 2021.
There will be setbacks along the way, and times when you are tempted to jack it all in and go on a massive spending spree. But if you keep going, you will see real results. This time next year you could be in a much stronger financial position than you ever dreamed possible.
We hope that these ideas help you to make the fresh financial start that you long for in 2021.
Check back here soon for more financial and lifestyle tips from Fair Finance.