Financial ClarityComments Off on Financial Clarity
Getting financially organised is important, because clarity is power. When you know your numbers, your finances are not as complicated as you might think. Clarity gives you the enthusiasm to make better decisions and live the life you want to live.
To get started, put your income at the top of a spreadsheet and then list out each of your expenditure items that are on your bank statements. Having things written down means you can come back to your numbers once a quarter, check what’s happening and make any changes needed.
Our income can come from several different sources, not necessarily just a salary, so getting organised means considering everything.
There are three main types of pension: defined benefit (final salary), defined contribution, and the state pension. Pensions can seem complicated, but they’re much less so if you have your information to hand. Clarity is power!
If you’re a current member of a defined benefit or defined contribution pension, you should receive a statement every year. If you’ve left the scheme because you’ve changed job, they may not send you statements, so you’ll have to contact them for a statement projecting what your pension will be. You should make time every year to do this as part of keeping your finances in order.
To get a projection on your likely state pension, you need to fill out a BR19 form with the Department for Work and Pensions. You can do this online, or you can request a form and fill out a hard copy, which takes typically around two weeks to come back to you with your information completed.
Your forecast will show you what you’ll receive if you carry on working until retirement age, as well as what you’ve accrued to date – so if you were never to work again, it will show you what you’d receive. If you’re close to retirement age, the numbers will be similar.
If you’ve been investing for a while, you may well have capital held with different providers, stockbrokers or accounts. You should contact each of them, asking for current and transfer valuations, which you can add to your spreadsheet.
If you have unsecured debt like loans or credit cards, you should consider whether to pay those off before investing further, to free up disposable income.
For most people, putting money into a pension rather than an ISA or other investment vehicle is a more efficient way of saving; a caveat to that is if you’ve earmarked the money to use before retirement.
One of the most common questions I’m asked by small business owners is, ‘How can I plan ahead when my income is variable?’ In a seasonal business for example, those variations can be significant. It comes down to having enough capital in the business to draw a fixed income from it.
Look at your business income and expenditure and put together a 12-month cash flow (I prefer a 36-month cash flow, but one year at least gets you started) which predicts how much money is going to come in and go out every month.
While your income might be variable now, a lot of your expenditure isn’t – office rent, wages, vehicle lease and so on are fixed costs. By looking at things over a year or more and seeing whether you’ll have a deficit or a surplus every month, you can work out the amount of money you need in the business to ensure positive cash flow.
Once you know your numbers, you might need to put a lump-sum into the business to be able to take a consistent monthly income from it. But doing so means that when it comes to your personal finances, you’ve got a predictable, regular payment coming in, and a better opportunity to plan.
On my website warrenshute.com you’ll find a spreadsheet which will help you organise your unsecured debt, with tips on using my snowball system to pay it off. This differs from simply arranging your debts in order of interest rate, because for me the psychology behind getting out of debt is so important.
The snowball system gives you a series of wins as you pay down your debt, keeping you motivated and energised to keep pushing forwards.
To get started on the snowball, or any other kind of plan for paying off your debt, find out your interest rate, your current balance and minimum payment for each card or loan: once you have this information you can attack the debt.
You don’t have to pay it off by Christmas or even in the next year, it’s a journey. What you do have to do is stop using cards and loans, put a strategy in place to pay them off over time, and enjoy the process of getting debt-free.
The time to act is now!
With only weeks of the year remaining, this is the perfect time to set yourself up to get organised. If you’re feeling out of control financially, then get on board with the 100-day Christmas Money Plan.
The plan is a series of simple steps in the build up to the big day to help you enjoy your festive fun without the financial fret. It started in late September but there’s plenty of time to catch up, just search on warrenshute.com to find everything you need.
If you’re worrying about your money then stop using your credit cards, even if it means having a different kind of Christmas this year. You’ll be much happier and ready to transform your finances in 2019.
Warren Shute was named UK Certified Financial Planner of the Year. His bestselling personal finance book The Money Plan is available on Amazon.