According to a YouGov poll, one of the most common New Year’s Resolutions is to save money and/or improve finances. The poll reports that over 40% of respondents had some form of financial resolution. It’s also a commonly accepted fact that many people overspend at Christmas which leads to a spiral of debt. The sad truth is that the overwhelming majority of New Year’s Resolutions fail by February. In this post, I’ll try to share some hints and tips to maximise your chances of improving your financial situation. The information and opinions here should not be interpreted as financial advice. I don’t know your circumstances, and if you want tailored financial advice please contact a qualified professional. If you are in financial difficulty, please consider contacting one of the organisations I list at the end of this post.
Past, Present & Future
There is no point in setting a goal of saving £200 per month, for example, if you don’t know what your finances look like right now. Do you have an accurate understanding of your direct debits, regular card payments, grocery shopping habits, money spent on leisure and socialising? If you don’t, then you can’t know how much to save. The worst thing you can do at this point is to start tracking your spending going forward. All that will happen is you’ll monitor your spending carefully for a few days, or weeks, and then get bored and forget about it. Instead, look back over your last three months of bank and credit card statements, and assign every entry to an appropriate category such as utility bills, food shopping etc. This will give you a more accurate idea of your true spending habits.
Once you know what you’ve been spending, you have a foundation to work from. Your true spending habits may be surprising. In an age of contactless payments, it’s very easy for lots of small transactions to be forgotten about, but small transactions can add up.
Following this exercise, you need to look at where your spending can be improved. I’m not one of those people that thinks you can go from broke to wealthy by cutting back on avocado on toast or dropping a latte a day. Life needs to be lived, and for many people a latte a day is what helps them not lose their shit at work. I can be quite confident though, that for most people, there will be things that can be improved upon. This might be as simple as switching a few branded items on the weekly shop to the supermarket’s own brand. For example, is there really a difference between Tesco’s own brand penne pasta and the more expensive kind?
Making changes to your grocery shopping, or utility providers may make an impact but it’s probably only going to be modest. More impactful changes will come from your big credit agreements, such as mortgages and car finance.
Mortgages
Mortgages come in all sorts of shapes and sizes, so it’s not practical or helpful to look at average figures. Instead, I’ll give a few examples.
If you have a mortgage of £100,000 with 15 years remaining on a repayment basis, and you’re on the lender variable rate of 3.5%, your monthly payment would be approximately £715. However, if you contact them and see about switching your deal, unless your loan-to-value is very high, you should be able to get a better interest rate. Securing a new deal at 2.5%, saving 1% on your old rate, would knock around £50 per month of your payment.
If you have a mortgage of £200,000 with 20 years remaining on a repayment basis, the same interest rates would result in the following payments; £1,160 on the lender variable rate, and £1,060 on a rate of 2.5%. In short, a call to your mortgage lender could save you some money.
Car Finance
I hate cars. I mean, I like getting from A to B quickly, and cars as a concept are great. What I hate is “car culture”; this attitude that a car is a fashion accessory like having the latest iPhone or the most up-to-date laptop. Cars are a colossal waste of money in most cases, and I’ll explain why.
Let’s assume you have a one-hour commute each way to work five days a week. You also have a school run five times a week at an hour each way. In addition to this, you make six hours of other journeys each week. A total of 26 hours of driving each week. In this example, your car is in use for 15% of the week, and it spends the other 85% of the time doing nothing. A little searching on Google suggests that the average UK car finance agreement is around £200 per month, with insurance, tax, and fuel on top of that.
Cars are a necessity for some people; I get that. However, apart from slightly different safety features and fuel efficiency, if you opt for anything other than functionality you are buying a car for the image. Is it worth spending potentially hundreds of pounds more each month for something that spends most of its life doing nothing?
The Future
Once you have looked at your financial situation in detail, you can look at what your monthly surplus or deficit is. If you find that you are in a deficit; i.e. you have more money going out than coming in, then you need to speak with an expert about this, and I’d encourage you to use the resources at the end of this post. If you find yourself with a surplus of cash each month then I would strongly suggest that you work in the following order; work on using that surplus to pay off debts with a high rate of interest, so things like credit cards out of their promotional period, or unsecured loans, for example. At the same time, use some of your surplus to build up an emergency fund. Ideally, you should aim to have a minimum of six months of expenses in reserve. Once you have accomplished this, you will be in a position to start investing.
The key to managing your finances is to automate as much as possible. Some banks now offer a feature where you can create a pot within your main account for bills. Then, you assign your regular payments to come from that pot. So, if you have ten payments totalling £900 each month for your mortgage, council tax, and so on, you can just transfer that cash to that pot each month. Anything left in your main account is there for you to spend on yourself. There are other ways to manage your money, but this is the approach I prefer.
Automation can also apply to your savings. This is sometimes termed Paying Yourself First.
Pay Yourself First
The idea is that as soon as you are paid, you put a chunk of that money to one side in a savings or investment account. That money is paid before anything else; hence the term, Paying Yourself First. This change in mindset forces you to work with the leftover amount to pay your expenses and household costs. For this to work, you need to have more money coming in than going out. This approach will not magically create money for you in the here and now. PYF does not work if you are simultaneously building a credit card balance. If, however, you have surplus cash that you end up spending on rubbish, this is a good way to build solid habits.
Financial Resources
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Mortgage Advisor on FIRE. 
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