Organise your finances

Besides it being the time to take advantage of tax relief plans, the beginning of the year is an opportune moment to take a close look at your finances so that you are prepared and organised for the months ahead.  Looking at the key areas:

Budget

As an overriding principle it is worth noting Mr Micawber’s advice to young David Copperfield in the Charles Dickens novel of the same name:

‘Annual income 20 pounds, annual expenditure 19 pounds 19 shillings and six pence, result happiness. Annual income 20 pounds, annual expenditure 20 pounds nought and six, result misery.  (David Copperfield by Charles Dickens – 1850)

The Micawber principle is as valid today as it was 174 years ago although a little more leeway between income and expenditure would be desirable!

A proper assessment of income versus expenditure is essential with the latter being the most important.

Firstly, list your monthly expenses and highlight those items which might be deemed unnecessary.  In this regard check on all household bills and subscriptions.  Then try and cut out or cut down on what are clearly non-essential items.

The objective is to not only stop wastage but to create as much disposable income as possible for investment.

Review your debt

Aim to reduce or even pay off your most expensive debt first.  Alternatively, if this cannot be done then look to consolidate your debt by transferring the most expensive to the cheapest.

This could be achieved by using an access bond to cover most debt.  Not only is the interest rate on the latter lower but so too are the repayments thus freeing up cash for investment elsewhere.  The only word of caution here is that by converting short term to longer term debt, you will pay more interest over the term of the latter.  It is important therefore to reduce or pay down this debt as well before the term has run its course but at least there is relief as regards current cash flow.

Savings

Having examined your budget and where possible reduced debt, hopefully there is a now a decent gap between income and expenditure.  Ideally this will allow firstly for an emergency fund to be created, if there isn’t one already, which would give 3 to 6 months of living expenses as a back-up.  With an emergency fund in place, ideally you should now aim to put aside around 15% -20% of your disposable income into investment for the medium to longer term.

Review long term goals

It’s easy to be caught up in the here and now when trying to manage one’s finances.  However, long term financial planning is crucial too.  Hopefully if you have disposable income you can set aside money to invest sufficiently for planned retirement.  Even if you are a member of an employer retirement plan, it is important that you do not rely on this to provide financial independence at retirement because it is unlikely to do so.

Please contact your Maximus adviser for a further discussion and advice on financial planning.

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