- Spend (more) time on your finances
The average person in the UK spends over 3 hours a day watching TV and less than a minute per day on their finances. On a monthly basis this translates to 100 hours of TV and 30 minutes on finances. Ideally, you would have everything set up so well that you only needed 30 minutes per month. But this is not the case for most people. The reason we don’t spend time on our finances is because we don’t like to. Sometimes we feel so anxious or guilty that we can’t even open our bills. Unfortunately, ignoring our finances does not work and actually increases stress because what we imagine is usually worse than reality. Spending 30 minutes per week is a reasonable target and, if you have time left over, you can use it for learning or for your money MOT. If you want to get good at something, you need to invest time in it; getting on top of your finances will improve every other area of your life.
- Learn how to build good habits
Building good habits is hard, particularly if the task is something you don’t enjoy and doesn’t seem to offer immediate benefits. However, the process of building habits has been analysed and there a number of good books and videos on the subject. According to James Clear, the basic principles are:
- Start small, very small. You need to establish the habit first and then you can improve it. While doing 1 pressup or walking for 10 minutes might be a good way to start your exercise routine, 1 minute on your finances isn’t going to get you very far. If your finances are a mess you will also need to do some preparation work. Start by making a list of all your finances – cards, bank accounts, loans etc. and make sure you know where all the statements and other documentation is. Spend 5-15 minutes on this per week till you have it all ready.
- Increase in small amounts. Once the preparation work is done, you will need to spend time understanding your finances. Don’t overwhelm yourself. The target is no more than 30 minutes per week.
- Break the tasks into chunks of just manageable difficulty. You need to stay motivated.
- If you miss a week, that’s OK. Just get back on track next week. Never miss twice. Set aside a time that you know will work every week.
- Be patient and stick to a pace you can maintain. Getting on top of your finances is based on regular investments of time, not locking yourself away for a weekend.
- Understand your spending
It’s impossible to get on top of your finances if you don’t know where your money goes. Not being in control of your spending is very scary and when we get scared our bodies release stress hormones. Once we get stressed it’s really hard to think properly and we usually give up. One of the key steps to financial wellbeing is being in control of your daily finances, and that starts with understanding your spending. Most of the new digital only banks give you a great high-level transaction summary, but this only works if you have all your transactions with one bank. If you want to get detailed breakdowns, or you have many accounts and cards, you will need a consolidation tool. You can do this by building a spreadsheet or some other kind of monitoring process. There is a good spreadsheet that you can download from https://www.financialwell-being.co.uk/free-stuff/ but the easiest way to do it is with Moneydashboard or Monehub. They are both free and once you have set them up you will really be able to manage your finances. You can see exactly where all your money goes and create spending plans for all areas of your life, including the ones that bring you most wellbeing. With spending under control, you can then start to save.
- Set savings goals
Let’s face it, saving is hard. There are so many calls on our money and very often there really is nothing left over. But, now that we have control of our daily finances, it should be possible to make conscious choices about whether we spend now or save now and spend later. We are hard-wired for instant gratification but we also know that we enjoy ourselves more when we use saved money to buy things instead of using debt. If saving is going to be a new habit, remember what the rules are for creating new habits. A really great place to start is by looking at what you just spent on Christmas and give yourself the goal to save that amount for next Christmas. January is a hard month to start, so use the time to get everything set up for February. Each month you should aim to save 10% of your target amount and by beginning of December you’ll be there. If you combine your start with an alcohol free month, you’ll easily find some savings. Not so long ago, people used Christmas Clubs to save up over the year, and this simple practice means that you don’t start the New Year with a massive financial hangover. Failure to budget for large one-off items is where most people run into trouble.
- Conduct a Money MOT
Most cars need an annual check and our finances our no different. Direct debits and standing orders are the silent killers of our finances. You may now be checking your expenses more regularly, but every year you should also review each one and see if you still need it. Cancel subscriptions for things you haven’t used for 6 months. Either you will end up saving the money or they will offer you a discount. Now review all other regular costs including:
- Utility Bills
Use a comparison website to see if you can save money on utility bills or insurance. Very often utility providers don’t inform you when they move you to a standard tariff (or the introduction period runs out), and they certainly don’t tell you when you can get a better deal elsewhere. Over 50% of households surveyed last year were on the standard tariff which means they would immediately save money by moving to a fixed-price tariff. Because most of our bills are electronic, we don’t notice when they have changed unless we download and review the bill. If you have a mortgage you should review it and see if you can get a better deal. Rates are at historic lows and there are many mortgage brokers who would love to see if they can help you. Mortgage broker fees should be less than £300 and are only payable if you switch. For a full service you should also review your pensions, insurance and other investments and make sure you have a will in place.
- Pay off expensive debt
If direct debits are the silent killers of financial welbeing, credit cards are the axe murderers. Worse still are payday loans. Expensive debt will crush you and when it gets too high you will struggle to pay more than the minimum monthly amount. If possible, consolidate and transfer credit card debt to a personal loan with your bank. The monthly payments (including principal repayment) on a loan will usually be less than just the credit card interest amount. If you do a 0% balance transfer make sure you set up a direct debit to pay off the balance before the 0% period ends. You should also bear in mind that a balance transfer can hurt your credit score and that 30% of your credit score is based on the amount of debt outstanding. When you do a balance transfer, the balance transfer fee will immediately increase the amount you owe.
- To reduce spending, introduce friction and feedback
When you pay for something using physical money, your brain registers the process as a loss and a gain. You are losing some cash and gaining something else. This micro-loss is a “flinch moment”, almost like brief physical pain, when we part with our money. This pain of parting with money can even keep some people from spending anything except the bare minimum. However, when we use a credit card there is no ‘flinch moment’ and the pain of payment is delayed (until that monthly bill arrives, anyway). The great ability of credit cards, in other words, is that they wield the psychological power of separating the pleasure of buying from the pain of paying. This causes us to spend more money when we use a credit card as there is no instant feedback mechanism. In addition, when websites ask to store our card details, they do this because it reduces the chances of us changing our minds or getting distracted while we get our wallets and enter all those numbers. This has the effect of making the buying process frictionless. To reduce spending try a using debit card (if it gives you an instant update) e-wallet or cash and put away the credit cards. In addition, never store card details online. It’s not safe and the only purpose is to help you spend money.
- Get help if you are struggling with debt
For most people, managing their finances is something they have never been shown how to do. Instead, they go through life with a set of unconscious beliefs and behaviours about money that developed during early childhood as they absorbed message from their parents and the wider cultural environment. As well as actual money worries, the inability to manage their finances leads people to feel shame and guilt. They are worried about being judged and, because money isn’t talked about, they don’t know where they can go for help. Marketers and the media bombard us with messages that all the problems of life can be solved through financial means, usually by buying things. It’s not surprising the people end up in debt. It’s more surprising that we not all drowning in it. Financial anxiety has a massive effect on your health and relationships and most people only ask for help when they are desperate. People who keep their struggles a secret go to the doctor 40% more often than those who don’t, so don’t leave it too late. Organisations such as National Debtline, Citzens Advice, the Debt Advice Foundation, StepChange can all help and also have useful websites. Asking for help is not a sign that you’ve given up; it’s a sign that you’re not giving up.
- Coaching helps you get better with money
For anything you want to get better at, there is a coach that can guide you, give you feedback and correct your mistakes. However, when it comes to money, there is this strange taboo that stops people asking for help unless they are really desperate. But money doesn’t come with instructions, and we have often no training in the one of the most important components of our wellbeing. Dealing with money is almost entirely emotional and the desire for comfort seeking is very powerful. This means that when thinking about money, our feedback mechanisms reinforce existing behaviour instead of helping us correct it. We shy away from things around money that make us feel uncomfortable and our patterns do not change. We also find it difficult to talk to friends because it’s risky – for it to work that other person has to be completely accepting, and the reality is we don’t tell our friends a lot of really deep and personal things because we think it might hurt the relationship. A money coach listens without judgement and helps you to understand your feelings and behaviours around money. This knowledge is the key to making the changes needed to develop positive financial behaviours – behaviours that will create long term financial wellbeing.