As the cost of living crisis continues, many of us are feeling less financially secure. Taking measures to simplify your finances will give you clarity and greater control over your money, helping you avoid overspending and maximise your ability to save.
Assess the situation
Begin by building a clear picture of your financial health. Calculate your salary after tax and voluntary deductions such as pension payments so you know how much money you see each month. Add up your total monthly outgoings including any debt repayments and compare this to your earnings. This will show whether you’re in the red or the black, and if you’re living within your means.
Create a budget
Using your income information and average expenses, create a budget which will act as the foundation for your financial management. List your essential spending such as accommodation costs and insurance policies, target savings and leisure funds. This makes it easy to see where your money is going so you can identify issues and areas for improvement.
It’s best to do this in an Excel document or with special software so your calculations can be automatically adjusted if your financial information changes, e.g., a subscription-based service raises its prices, or you get a larger salary following a promotion.
Prioritise debt repayment
A priority for simplifying your finances is to focus on debt. Long-term loans with scheduled repayments, such as mortgages, can be paid off gradually while you save. However, short-term borrowing options like credit cards and overdrafts often have high interest rates and must be settled as soon as possible to avoid the money owed spiralling out of control.
Consider the different repayment methods and work out which would be most effective for you. You could ‘snowball’ your repayments, settling the smallest debt first, or go for the ‘avalanche’ strategy where you pay off the largest debt first. With either method, you must continue to pay the minimums on your other loans.
Another strategy is to investigate the option of debt consolidation loans which unite your debts into one so you can pay off all money owed simultaneously in one larger monthly sum. This straightforward strategy can feel less stressful and give you peace of mind that all loans are being taken care of.
Build an emergency fund
Sudden demands on your finances are a regular occurrence in adult life. Whether it’s a rise in fuel prices, an unexpectedly big car service bill or the arrival of a new family member, these added costs can send our spending and savings out of balance.
Prepare in advance for these moments by taking steps to build an emergency fund. Follow budgeting methods like 50/30/20 to commit to putting away a set portion of your monthly salary into savings. This money can supplement large expenses so you can stay on track with your spending and savings despite the interruption to your routine. Ideally, your emergency fund should be at least the equivalent of three months’ salary.