For many people the end of the year and the start of a new one is a time to reflect on their income over the year and see how things have gone.
Although 2020 has been an extraordinary year due to the global pandemic, even if it’s been a bad year financially, it is still a good idea to review where you stand and think about budgeting for the future, if you don’t do so already.
A budget is simply where you identify your income and expenses and decide if you need to pay off some debt or can afford to save and how much.
The point of having a budget is to take control of your finances, to avoid being ‘caught out’ by an unexpected bill or finding you can’t afford to do what you want. If you have debts, having a budget to help pay them off puts you in control and avoids the debt becoming so big that you are forced to take drastic action.
You may think that only the Chancellor of the Exchequer needs a detailed budget and you may be right. You need to find what works for you. Some people simply have an idea in their head of what they can afford to do each month. Other people like to itemise everything on a spreadsheet and go through it regularly. What matters is that you think about what you earn and what you spend and monitor it so that you know whether you are on track or need to amend your budgeting.
You probably have a clear definition of the amount you earn, whether by working, or rent from a property, or income on your investments. What may be a little fuzzy is the amount you spend. During lockdown there has been increased spending online and it’s so easy to press the ‘buy now’ button, especially if things are not going well. Ideally you need to consider what you generally spend in an average month, if there is such a thing for you, and also plan for expenditure that happens less regularly but is still part of your essential living costs such as a quarterly utility bill or annual oil top-up.
If you can’t remember, ideally look back over the past 12 months – or the last 2 or 3 months of bank statements – to see where your money is going each month. (An ideal job for anyone who is in self-isolation but not sick!) Are you paying for subscriptions you don’t need any more? Are you on an old tariff for your mobile phone? Companies nowadays won’t contact you with a better deal; unfortunately, you have to ‘shop around’ but you might make significant savings on your utility bills, mobile phone tariff, streaming services or club memberships.
When you have worked out your income and average spending, is your income more than your expenses on average? If yes, then make sure you also have an emergency fund of cash, ‘just in case’. This varies depending on your situation, but at Alexander Forbes Offshore we recommend 3 to 6 months of income. This helps avoid a crisis if you receive an unexpected bill or expense in the short term or if you suddenly lose your job and need to cover your essential expenditure while you look for another one.
Once your emergency fund is taken care of, you can decide how much to save for the longer term. Setting money aside now for you to spend later is sound financial planning. The power of compounding (where the interest you earn on the money you have itself earns interest) will propel your savings ever higher once you get going.
You may have a specific goal you are saving for such as a holiday (remember those?) or university expenses, or it may be putting a monthly amount away for your retirement. If you’re already retired, you might be thinking about the Long-Term Care Scheme and the costs of a care home. Saving early will have a significant impact on the amount you have later, so even putting a small amount aside each month will build up into a tidy sum if left alone to grow.
This is where you should seek advice from one of our financial advisers to ensure that you plan and save in the right product, with the right level of risk that will help you meet your saving objectives.
Carrying out a review of your finances is the first step. Sometimes the harder part is keeping up a good habit. There are hundreds of articles online with great tips and hints. Below are two very popular ones: the first one Motley Fool is from the US and the second is offered by the UK government.
There are a range of apps available that will help with budgeting. Some help you to create a spreadsheet, some bank apps will round up your spending so that pennies go into a savings account automatically, and others will track your spending and show you where your money is going. Anything you can do to save will help build up your funds over time.
If you owe money other than a mortgage or planned loan and feel it is out of control and you need professional help, you can contact the Citizens Advice Bureau in Jersey at https://www.cab.org.je/ or ask friends or relatives for their advice. Debt can spiral out of control if you don’t do anything about it, so although you might be tempted to ignore the bills coming through the letterbox or pinging into your inbox, it’s important to face facts. If you’ve got a mortgage or loan and can’t pay it, for whatever reason, speak to your mortgage lender and tell them the situation you are in.
You can budget to pay off a small amount of your debts at first and as you see the amount falling, you may be able to pay more until finally it is paid. The one fact we know about debt is that it won’t go away unless you do something about it.
Sometimes people find it difficult to work out whether you should pay off more debt or to save for your future. This is again where you need to take advice to help you plan your approach to this because everyone is different and has their own expectations.
For financial advice on investments, protection or pensions contact one of our experienced professional advisers at the details below.
+44 1534 837837
PO Box 336, 2 - 6 Church Street, St Helier, JE4 8UU
Alexander Forbes Offshore is the registered trading name of Alexander Forbes Channel Islands Limited. Company number: 9596. Regulated by the Jersey Financial Services Commission.