Get on top of your finances this year
With just having had the most expensive part of the year, and starting a new one, many of us may be thinking about doing better with money in 2022
Why?
The first thing to consider is how you want to make use of money in the longer term. This can look different for everyone, but here are some common themes:
- Save up to buy a house
- Pay off mortgage or student loan debt
- Replace some or all of your current income in order to quit your job and do something else
- leaving a legacy for your children
It’s important to have a tangible goal as this helps you to be motivated.
How?
Control your spending
There’s several methods to do this, and I think I’ve tried most of them. The thing that my wife and I found most helpful ended up saving a lot of money each month. We used to put everything on credit card. There are definite benefits to this as long as you pay it off in full every month. For instance, it’s not technically your money, you can often get money back for spending on the card, and your purchases are protected up to a certain value. The main downside however is that it’s quite hard to keep track of what you’re actually spending, so it’s easy to go over budget.
We stopped using our credit cards a few years ago and instead both got new personal accounts with Monzo. Each week we have a direct debit set up to put £90 into each of our accounts. That’s our money to spend on day to day things. Most of it will go to shared expenses (which Monzo is really useful for), but anything that is left over is our own money to spend how we like guilt free. The idea is that you decide on a reasonable amount for the week, and that’s all you can spend that week. It doesn’t need to be Monzo, but having an account separate from your main account makes it more difficult to cheat by topping up mid week.
There is a small amount of discipline involved, which is why it’s important to have your goal clear in your mind. There’s also some weeks where you will spend more than others, and once you have a few of those weeks, you’ll soon start to think more about events coming up that might mean you’ll spend more money, and hold some money back for these weeks.
Invest
Interest rates are not worth talking about at the moment (in the UK at least). There’s no point in having your money sitting in an account where it is earning a fraction of a percent. It’s likely that inflation will mean that your money will actually be worth less if you leave it in these types of accounts.
My wife and I do have some money in these accounts however as they are pretty safe. We have our emergency fund in an account that earns 0.5% and we can access the money instantly if we need to. Before you do any investment, I’d recommend building an emergency fund. Figure out roughly how much you need each month, and then put money aside until you have that amount set aside. Then make it two months or three months. We have somewhere between two and three months, but it’s a figure we’re comfortable with.
It’s important to note that with any investment your money is at risk because it could go up or down. There are several ways in which we invest, each with pros and cons. All the investments I’m going to talk about are medium to long term strategies.
- Property. We purchased our first property a few years ago and it’s the one we live in. Over time property tends to go up in value, so hopefully when we come to sell our property it will be worth more than what we have spent on it. The property value could go down, but in theory, over a long enough time it should go up.
- Index funds. An index fund is made up of a collection of individual shares or bonds which means that it is diversified, ie. all of your eggs are not in the same basket, which reduces your risk. If any one of the companies represented was to go bankrupt, you wouldn’t have as big of a loss as if you invested solely in that one company. One of the most common and well performing index funds is called S&P 500 which is made up of large companies such as Google, Amazon, Tesla etc. We use Vanguard to invest in index funds. You’ll find more detailed educational information on their website. We have diversified further by investing in about ten different index funds. At the time of writing we have a 24.6% return on investment (much better than the 0.5% savings account)
- Individual funds. I’m reluctant to suggest individual funds, as it is a lot riskier than index funds because it isn’t diversified at all. A few times recently I’ve invested about £50 or so into a few different companies like Apple or Tesla, mainly for fun, but I did get lucky with my timings and made a little money from it. I use FreeTrade and if you use this link to download the app you can get a free share between £3–£200. Full disclosure, I will also get a free share — but it’s free money for both of us, so win win!
- Rental property. If you’re fortunate enough to be able to afford it, rental properties can provide you with a regular income, however they come with their own risks and expenses. Risks are mostly related to bad tenants (late payment, vandalism etc), but other risks that are concerning landlords recently are global pandemics and tax changes. On the expenses side of things, you’re responsible to keep the property in good condition, which requires maintenance costs.
Do a direct debit cleanup
Today is the age of the subscription. There’s likely a bunch of subscriptions you’re paying for that you don’t really need. Ask yourself if they bring you joy, or if you’d prefer to make progress towards your goal instead. Get rid of any you don’t need (except medium obviously :) ), and check your monthly bills to see if you can switch and save.
Don’t neglect generosity
It’s unlikely that your goal will be more important than the people around you, so be kind and generous to them. You won’t regret being generous, but you might regret relationships not being as rich as they could be.
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