Inflation is the highest it’s been in decades. Every point of purchase in our day to day lives is on the increase. It has never been more important to take stock and understand our financial health.
It is without a doubt, a fearful time and fear can lead us to avoid problems of any nature, fear can even cause us to deny problems exist. With financial matters this can lead to disaster.
By doing a financial wellbeing check, we can determine if any adjustments need to be made, which can include, investments, outgoings, savings and spending.
Here are five ways in which to take control of your financial wellbeing and move forward confident in your ability to adjust to changing economic circumstances.
Step one – Calculate your own balance sheet.
It’s not as complicated as it sounds. In one place, which might be a spreadsheet if you are tech savvy, note down everything you own (house, car, investments, savings etc) verses everything you owe (mortgage, loans, credit cards). This is your first gauge as to how you are doing financially. For some it may be a negative number, in other words, you owe more than you own and that’s ok. Ideally you want to be in a positive situation e.g. by paying off your mortgage you owe less each year. This is nothing more than a measuring stick to see at a glance your net worth. The higher your net worth the stronger your overall financial position.
Step two – Work out your levels of debt.
This is about understanding if your debt levels are appropriate. Debt is considered what you cannot easily get out of e.g. a mortgage, car loan or credit card debt. Experts say that a ratio of between 20 and 30% is positive. An example would be if your net income per month is £2,500 and you have a mortgage of £600, student loan of £50 and a car loan of £80 per month, you are looking at a debt ratio of roughly 29%. The reason this is important is because it may determine whether you are able to take out further financing if you need it, in other words it’s a primary factor in your credit score. If your ratio is over 30%, it’s a warning sign that you need to take steps to reduce.
Step three – Find out where your money is going
We know that budgeting is a good but few of us do it. We may budget for grocery shopping but forget about the extras we spend each month that can add up quickly and leave us wondering where our money went. Many on line banking apps now have a way of showing you where your money is going, these can be very helpful. It’s also important to look at annual expenses such as road tax, TV licence, insurance and big expenses like Christmas presents. It can be a real eye opener when it’s all written down in one place. Once you have all of the information you can see where you might be spending unnecessarily. Tips like setting a budget for petrol may work if you only use the car for leisure purposes. Instead of filling the tank each week and succumbing to price increases, set a budget and stick to it. It will make you think twice about jumping in the car. Cutting out takeaways for a few months, checking you are on the best insurance deals, renting out an extra room, selling unwanted items and switching off devices at the plug (average £40 per year savings) are all areas to consider.
Step four – Have an investment strategy
A what? This is assuming that there’s money left over right? Wrong. Regardless of whether you are cash rich right now, thinking about the future is always a good idea. You may not be able to save anything and that’s ok, but investment isn’t always just about spare income. It may be assessing your mortgage, after all your home is your largest investment. You may have money in an ISA, are you getting the best rate for it? If you are able to save each month, where is it going? Your workplace pension is also key, ensuring you are investing your pension in the right way can make a difference down the line. Experts will tell you that saving at least six months’ worth of expenses is a positive place to be in when there is a financial emergency.
Step five – Have a plan
Setting financial goals can be challenging. Consider this extract from Alice’s Adventures in Wonderland:-
Alice came to a fork in the road and saw a Cheshire cat in a tree.
“Which road do I take?” she asked.
“Where do you want to go?”
“I don’t know,” Alice answered.
“Then,” said the cat “it doesn’t matter”.
Right now, it may be surviving the cost of living crisis but one thing is clear if you have no understanding of where you want to or need to be, then any actions will be a stab in the dark. Think about the short and long term, what are your life circumstances now and how might they change in the future? Having a plan not only starts to address immediate financial issues but will alleviate some of the anxiety because you have taken control of your situation and faced the fear.
Checking in on your finances is important and not a one off exercise. Once or twice a year could be difference to improve your position. Remember to take small steps, you can’t change everything all at once but it’s never too soon to start.
