The New Year is a time when we look forward, determined to make changes for the better. Where better to begin than with your finances?
Whether it is tidying up your insurances, increasing your savings rate, or simply taking control over your spending, now is the time to do it. Once you have a solid plan in place for your finances, you will be stress free to enjoy the other elements of your life.
We have written some New Year’s Financial Resolutions to help people understand what is required keep your finances in shape
Resolution 1: Understand your Cashflow
The main aim is to make sure that you are spending less than you earn. It is very important that you tell your money where to go, not wonder where it went.
Know what you are spending: There are 3 key headline figures you should know… How much income you’re bringing in, How much you’re spending, and how much you’re saving.
If you are really unclear on these numbers then do not panic, you are not alone! Try reviewing bank and credit card statements, setting up a spreadsheet or using a budgeting app. This will help you determine the cost of your fixed monthly expenses, such as your mortgage and other living expenses, and how much you are spending on non-essentials. That information can help you identify any money leaks.
Know why you are saving: If you are saving without a focus or intention then your chances of success are a lot lower than if you have identified and costed goals. A good financial planner can help you work out how much you need to save or invest to meet a specific goal.
Project the cost of essential big-ticket items: If you have a large expense such as expensive home repairs or big family holiday coming in the near future, save for it in term cash deposits and keep the money separate from your current account. Do not place this money in investments that can go up and down in value – as a general rule you should only Invest money for goals 5+ years in the future.
Automate your savings and investments: With any saving/investment goal – try and make sure that your contributions are programmed to occur automatically. Pay yourself first, by making sure savings leave your current account straight after payday. This ensures you keep to your savings targets and do not spend your extra income on non-essentials. This is by far and away the biggest contributing factor to successfully building wealth. We will cover retirement planning under investment.
Resolution 2: Manage your debts
For many people, some level of debt is a practical necessity, especially to purchase a home. Problems arise when debt becomes the master, not the other way around.
Keep your total debt load manageable: Don’t confuse what you can borrow with what you should borrow. Keep the monthly costs of borrowing (including mortgage) to below a third of your take home income.
Eliminate high-cost, consumer debt: Try to pay off credit card debt in full every month and avoid borrowing to buy depreciating assets, such as cars. The cost of consumer debt adds up quickly if you carry a balance. For any sort of debt, it is vital that you have a clear and disciplined plan to pay it back.
Review your mortgage rate: It is worth checking that your mortgage rate is commercially competitive. Rates often change and banks will, from time to time make new offers. Improving your mortgage terms can save you a lot of money every month.
Resolution 3: Understand your investments
Research shows trying to time the markets is counter-productive. It is important that you create a plan that will help you stay disciplined throughout all market cycles, both positive & negative. Follow your plan and adjust it as needed.
Focus on your investment mix: After committing to a savings plan, how you invest is your next most important decision. Make sure your portfolio is in line with your long-term goals, risk tolerance and time frame. The longer your time horizon, the more of your funds should be invested in the stock market.
Diversify: Diversification reduces investment volatility and can be a critical factor in helping you stick to your plans and reach your goals. You should never own enough of one thing to make a killing in it or be killed by it! Mutual funds and exchange-traded funds (ETFs) are great ways to own a diversified global portfolio. A good financial planner can help you select an appropriate investment portfolio.
Monitor and rebalance your portfolio as needed: Remember, the long-term progress that you make toward your goals is more important than short-term portfolio performance. Rebalancing has the long-term effect of banking your gains and buying into things when they are on sale. As you approach a savings goal, such as the beginning of a child’s education or retirement, begin to switch to investments with lower volatility, if appropriate.
Understand your retirement plan: Let’s not even call it retirement, let’s call it your financial future – your way to work less and live more. How many months are left in your “Wealth window”? If you turn 40 today and want to retire at 60, you have 240 months/payslips to save for retirement. Life is a balance between enjoying now and living later, retirement contributions are simply deferred spending. Everyone is different so you should talk to an experienced advisor to help you understand what your best course of action is.
As a rule of thumb if you are starting in your twenties, you should aim to save 10–15% of your pre-tax income, including any employer payments. If you start later, you have some catching up to do so add 10% for every decade you delay saving for retirement.
Tidy up existing pensions and Investments: Gather the details of all of your existing pension and investment accounts. They may be worth more than you thought or alternatively, be giving you a false sense of confidence.
If it makes sense you could simplify your life by consolidating funds into one account, making you money much easier to manage. With one provider you have one set of charges and you can keep a closer eye on how your funds are performing.
Resolution 4: Prepare for the unexpected
Risks are a simple part of everyday life, the best you can do is be aware of them, plan and prepare for them. Your financial life can be threatened by all kinds of surprises— illness, job loss, disability, death or natural disasters. Luckily, you are able to insure against many of these bad surprises. Insurance helps protect against unforeseen events that don’t happen often, but are expensive to manage when they do.
Make sure that you have a safety net: Having accessible cash savings lowers stress and can make you happier. Before thinking about investments, it’s important that you have a cash buffer with three to six months’ worth of essential living expenses in case of emergency. This should be liquid and held in cash savings. It is there to help you cover unexpected-but-necessary expenses without having to sell investments or take on expensive loans or credit card debt. Never use it to pay for non-essential things – emergencies only!
Review your existing Life Insurance Provision:
Review what cover is offered by your employer – many companies will give a degree of insurance as part of your package.
If you have dependents or you have large liabilities that will continue after your death, you will likely need additional life insurance. A good financial planner can help you work out the correct level of cover you should be carrying.
Review any private insurances that you have and make sure that the levels and terms are still relevant to your needs. You should also make sure that these plans offer good value.
Protect against large medical expenses with health insurance: Select a health insurance policy that matches your needs in coverage, deductibles, and choice of medical providers. If you’re in good health and don’t visit the doctor often, you may choose to consider a high-deductible policy to insure against the possibility of a serious illness or unexpected health-care event, whilst covering the cost of day to day medical expenses yourself.
Protect your earning power with long-term disability insurance: The odds of becoming disabled are greater than the odds of dying young. Your future earnings or “human capital” are likely to be your greatest asset and so it makes sense to protect them. If you are a 40 year old earning $75,000 a year and plan to retire at 60, even without any payrises or bonuses, your future salary is worth $1.5m USD!
Resolution 5: Protect your estate
An estate plan may seem like something only for the old and wealthy but, there are simple steps everyone should take. Without proper beneficiary designations, a will and other basic steps, the fate of your assets and ultimately your family, may be decided by attorneys, courts and tax agencies. Taxes and legal fees can eat away at these assets and delay the distribution of money just when your heirs need it most.
Make sure you have appointed beneficiaries for retirement accounts and life insurance: Beneficiary designation is your first line of defence, to make your wishes for assets known, and to ensure that they are transferred to who you want quickly upon your death. Keep information on beneficiaries up-to-date to ensure the proceeds of life insurance policies and retirement accounts are consistent with your wishes.
This is not straight forward for bank or everyday investment accounts as they do not normally allow you to name a beneficiary. A good financial planner can help you either move assets into a more appropriate structure or re-title assets so that they can be smoothly passed on death.
Update or prepare your will: A will isn’t just about transferring assets. It can provide for your dependents’ support and care, and help you avoid the costs and delays associated with dying without one. It can also spell out plans to repay debts, such as a credit card or mortgage. A beneficiary designation or asset titling should always supersede what’s written in a will, so make sure all documents are consistent and reflect your desires. When writing a will, we recommend working with an experienced lawyer or estate planning attorney.
This article focuses on financial assets but you should also make sure you discuss provisions for the care of dependents. Also, ensure that your lawyer can confirm how both international & domestic assets will be treated.
Take care of important estate documents: Make sure a trusted and competent family member or close friend knows the location of your important estate documents. EBG can help you prepare a special “in case of emergency” pack that you can leave for your loved ones should you pass away.
Have a power of attorney for health care: In these documents, appoint trusted and competent confidants to make decisions on your behalf if you become incapacitated.
Finally, remember you don’t have to do everything at once. There’s a lot you can do to improve your financial health. Even if you just commit to doing one of the things in this article each month, you will finish the year in a much stronger position than you started it