It’s that time of the year again, when people start thinking about what they would like to achieve in the year ahead. And losing weight and exercising more always top the list of most people’s general resolutions, but when it comes to our financial goals, year after year, research shows that three in particular always top our wish list and they are:
1. Save more
2. Spend less
3. Pay off debt
The reasons behind these resolutions, I think, are probably down to a fear of encountering unexpected expenses and not having enough money to pay for them, frustration that at the end of the month there is no money left in bank accounts, and when it comes to people’s debt levels, they appear to be never ending. Yet despite making repayments on time, the amount owing does not appear to be reducing much.
Whatever your particular financial resolutions are for the year ahead, figuring out how to achieve them is obviously very important, but the key for achieving anything I believe is putting in the hard work, staying committed to the cause and doing what it takes to make them become a reality. For example, according to one study, only 75% of people have kept to their resolution in the first week (incredibly one quarter of people give up after only seven days). 71% stick to them after two weeks, 64% past one month and 46% after six months.
I think there are a number of reasons why people don’t reach their financial goals and why the dropout rate so is so high so quickly and one of those reasons is because people are trying to sprint to the finish.
And what I mean by this is that they want to see instant results. They set goals that simply aren’t realistic and quickly find out that in order to achieve what they set out to they need to make major changes to their budget and how they spend money and they aren’t willing to do it. Some don’t even try because they don’t know where to begin and become so overwhelmed by what they think they have to do, they just give up.
So, when you are setting a goal for the year ahead, give yourself time to achieve it by making a long term plan and break it down to short term measureable steps - for example if you want to save €2,000 over 12 months, then break this amount into a series of small steps – how much do you need to save each day (€5.48) or month (€166.67) - doing this is easier than trying to tackle saving €2,000 all in one go.
And even when you break down the amount you need to save each week into smaller amounts and they are still beyond your reach, rather than giving up, just adjust your target amount downwards or give yourself more time to reach it - it might take a little longer that’s all. But don’t be afraid of doing this and amending your target before you even begin, because achieving your New Year’s resolution is all about being realistic. There is no point in setting yourself up for failure from the outset by setting goals that are just not attainable within your current circumstances so rather than having none, have ones that fit your income and time frame.
And when you are setting a goal for the year ahead, put some thought into what you really want for the year ahead and take your time when figuring out what that is. What you would like to see happen to your finances this year, really want happen and what is it that means so much to you that it will make you push yourself to achieve it?
I would recommend starting out having just one goal and concentrating and putting all of your efforts into achieving it. Having too many goals means progress may be slow and when you are only making small inroads into each goal, your motivation may wain when you see that all your efforts and sacrifices are not making a massive difference. And no matter what your financial resolutions are this year, getting in control of your monthly outgoings is the first step in achieving them. If you are not tracking what you are spending each month and spending less than you earn, then you simply cannot achieve your other financial goals - it’s mission impossible.
If you don’t have a budget in place, then you have no idea what you are spending your money on and you have no idea what areas you can cut back on, give up or get better value on. By tracking how much money is coming in and most importantly what is going out, you will begin to develop a much clearer picture of what you are capable of doing in the year ahead. And I think managing your finances by budgeting on a monthly basis is a goal or resolution in itself, but the bonus of managing your finances more closely each month means it will help you spend less on the things you don’t actually need or want, freeing up more money that can be used to pay down debt or save. However, you don’t want to overdo it either by micro managing your finances too much, where you have no room in your budget for spending lapses or guilt free purchases – if your budget is too strict and doesn’t allow yourself some wriggle room, you risk getting budget burnout and if this happens you just slip back into your old, bad habits. When you look at your budget, start by identifying those expenses that you have to pay each month, things like your mortgage, rent, utilities, insurance premiums etc. and then subtract them from your total net monthly income and whatever is left over is available for your variable expenses.
And once you know what money is left over, you must then decide what, is the amount you can comfortably each month, set aside, for savings and or paying down debt?
Next week I will be looking at strategies you can use in the year ahead that will help you achieve those goals of saving more, spending less and paying down debt in a much faster way. Have a great 2016.
Liam Croke is MD of Harmonics Financial Ltd based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie