What’s your financial goal for 2014?
The above quote by author, entrepreneur, marketer, and public speaker Seth Godin may be true for some, however it seems to me that the people who get things done, who lead, who grow and who make an impact … have goals.
It’s early 2014 and no doubt some New Year’s Resolutions have been made. Lose weight, improve fitness, quit smoking, save more money … they are all very common goals. Particularly the last one!
To improve your financial position it is important to create a goal for the year. Creating a goal helps you identify what you want to achieve, measure your success and keep you motivated to stick to your strategy throughout the year. If you can see results, you are more likely to stick to it.
According to global fund management firm Fidelity’s 2014 New Year Financial Resolutions Study, the top goals made for this year are:
- Save more money — 54%
- Pay off debt — 24%
- Spend less money – 19%
- Develop a long-term-goal plan — 13%
- Make/stick to a budget — 12%
- Pay down credit card debt – 8%
Interestingly, only 12% had a financial resolution of making a budget. We have a not-so-secret concept for you: making and sticking to a budget can help you achieve the above resolutions.
The 5 critical steps to setting up a financial budget plan are:
1) Identify your Specific Goals.
Try not to leave it just at “save more money”. Dig down further and itemise each individual goal. Whether it is paying off the credit card, a holiday, new car or just paying off the current one, list each goal separately and what you need in financial terms to achieve it. Do not worry about time frames just yet, this will come in Step 3.
2) Setup your Budget.
Until you know exactly what financial position you are in, you cannot fix your goals. To make it easy, visit the MoneySmart website available from our homepage, and download the Budget Planner into Excel. This tool itemises each area of expenditure, and importantly all income you receive (individually or as a family). It also provides an excellent summary and net financial position.
TIP: Ensure you are maximising your tax return each year. A little research or speaking with a professional may open up deductions or rebates you have not been claiming in the past.
3) Structure your goals.
Now you have your Budget and know what your cash flow is, you can start to prioritise and schedule your Specific Goals. We may not be financially able to achieve them all in the short-term, however now we need to work out which are the most important. Reducing debt is the most common. Prioritise each of the goals in order, and compare this to your budget and what surplus cash you have each month. You may need to extend your time frame for some goals, or possibly reduce the goal if it is saving for a particular outcome (i.e. holiday).
Importantly, start to look for real savings within your existing budget. Highlight each item that “may” be reduced, and work through each on a timeline. Don’t try and do it all at once: attack the big expense items sooner rather than later.
Whether it be restructuring your home loan and using equity or an offset account to save on interest, reviewing all your bills and suppliers to see if you can find a better deal, or simply asking your existing supplier, it’s worth the effort. Again, be realistic. If you are currently spending $800 a month on groceries, budgeting for $500 is probably very hard to do.
TIP: A lot of mortgage lenders make borrowers take out life insurance as part of the loan and fund the premiums personally … this can be held via your superannuation which automatically increases your personal cash flow. You may also already have insurance via your super: are you doubling up?
There are a number of ways of doing this depending on your specific goals. For example set up separate bank accounts into which you transfer amounts to cover each of your expense areas. Especially for those irregular expenses (such as car registration) ensuring you have cash available when they arise (try not to add it to the credit card and then pay the card off over time).
Ensure you do not take on additional and unnecessary commitments (i.e. if you find an additional $500 a month in your budget, no need to go upgrading the car!).
TIP: If you have equity in your home and consider consolidating other debt into your lower interest rate home loan, maintain your existing repayments. If you maintain your minimum repayments, consolidating say $10,000 from a credit card or car loan and paying this off over 20 years adds considerably more interest than you would have paid. The lower interest is a benefit, and the saving from a lower interest rate should be used to further reduce debt.
5) Review and Revisit.
Your budget – just like your financial plan – should be revisited regularly. Set aside 1 hour on a specific day each month (the day after you’re paid?) to review your spending, ensure the bills are consistent amounts with what you forecast, review any annual expenses for savings and so on. Update your actual spending pattern also and track your progress. This also helps in seeing your progress, particularly in areas you have been able to cut your spending.
TIP: Many of us are tablet and/or smart phone users. Luckily, there are apps out there that will help keep us inspired and hold us accountable to help reach our financial goals. Have a look at apps such as “goalGETTER” and “Mint”.
Finally, a budget is not just for a young individual or a family. If you are heading towards retirement in the next 10 to 15 years, it can also identify and track your progress in reaching the financial position you need to retire. Or potentially retire sooner! This also helps start the conversation “what do I need to retire?”.
We can help you start the process by identifying your goals regardless of your current situation, and assist you to gain the confidence to manage life’s financial challenges. Contact us and make 2014 your best year yet.