With 2022 just around the corner, now is the perfect time to consider your family financial requirements for the new year. Cherie-Anne Baxter from Unividual offers some great advice…
With the half term holidays now over us, now is a perfect time to relax and consider what we would like to focus on for 2022. A period of downtime gives us a chance to plan and do some of those things you might have been putting off.
Breathe, plan and organise
There are things in life we should do that are good for us, but procrastination kicks in and we prioritise something else. Often when it comes to planning our family finances this can be because of a fear of the unknown. The New Year often provides an impetus to address things like health and finances.
If the recent pandemic has shown us anything, it’s the need to make sure our family financial safety nets are in good condition to weather future harder times. We are not talking about using up tax allowances, combining pension pots to save on administration charges or making a will. These are all things that should already be in place. If they are not then your first job on the list could be to identify if you could benefit from financial advice to get all of these things done for you.
What we are going to look at are three key financial tips for the summer:
1. Reviewing expenditure
2. Managing debts
3. Deferred savings
The psychology behind reviewing expenditure
You might already know about utilities and insurance comparison websites but why do we not get around to using them? Most advertising is based on ‘saving you money’ which sounds like a no brainer. However, it’s still going to cost you more time, effort and energy than just doing nothing. So, how do we break free from our inertia?
Behavioural research shows that by reframing this from ‘doing this will save £x’ to ‘doing this will stop me losing £x of my hard earned money unnecessarily’ can increase our propensity to act by around 300%. For example, think about a time when you have misplaced or lost a £10 note. How did that make you feel, and how much energy did you expend trying to find it? Compare that with, for example, a £10 lottery win that took a little time to go back to the shop to collect.
By applying that mindset to your regular expenditure, think ‘how much am I losing due to not getting the best deal’ – this will give you the push you need. Especially if counted in units of something you like. For example, instead of money, how many family trips to the cinema are you missing out on?
How to pay off debt successfully
If you have more than one debt, such as credit cards, loans, mortgage etc, logic suggests addressing the debt with the highest interest rate first by overpaying. However, behavioural economics research suggests that you may form better long-term financial habits by clearing off the debt with the smallest outstanding balance first. Think of debt as a tube of Pringles – ‘once you pop you can’t stop’. Once you start clearing off small amounts of debt, it creates a feeling of success, completion, closure, and satisfaction. This strategy is then more likely to lead to you continuing and clearing your next debt, all the while forming good habits.
The problem with saving
There are five common reasons why people put off saving, some people keep quite a bit of money in a bank account, without realising the dangers of inflation. Others think do I have enough spare cash to start saving and investing?
What if you decided to save, but selected the date to start in a few months’ time, rather than now? Logic suggests that the sooner you start saving the better it will be because you build up funds more quickly. However, to some it means that the ‘pain’ of saving money hits sooner, which can either decrease the amount you are willing to save regularly, or even put you off doing it all together.
Behavioural research has shown that if we decide to set a start date a short time in the future, and can tie it in with an event, such as a salary review, birthday or the end of term, then we are more likely to select a more realistic amount to save. So, when the time comes for it to start, we feel far less impact emotionally and logically to our disposable budget.
Nurturing your finances like a garden
Like the old Chinese proverb ‘the best time to plant a tree is now, and twenty years ago’. Small adjustments make a big difference to wealth, there really is no time like the present to get on and mend your financial roof while the sun shines. We always say to people, it doesn’t have to be a big exercise, you can nurture your family’s financial situation just like your garden, a little bit every week.
If, like most people, some of these tips feel a bit overwhelming or you just don’t have the time to get things organised, perhaps think about getting some financial advice from a Chartered Financial Planner.