Financial Resolutions and Change
I decided to get the jump on the New Year’s crowd.
Looking at your finances is akin to bringing the bins out, bringing books back to the library, making the school lunches for the kids. You put them off (well I do) but you can’t forever. Hungry kids and overflowing bins are strong motivators.
Your personal finances kind of hover in the background and need attention too. If you don’t the immediate fallout from these is not apparent, not right away anyway. Systematic neglect of this area will cost you more money than you realise though. This is not to mention the stress and anxiety that goes hand in hand with being in debt or in financial darkness. Wouldn’t you prefer to be in control and less stressed?
First thing is the “overwhelm”. This is what makes many procrastinate about their finances. The sheer weight of jargon, terminology, choice and decision making put together is enough to make people run and hide. They feel pressured into courses of actions if they see a “professional”. If you feel overwhelmed tackle it in stages but start tackling it yourself. By that I mean don’t give the job to someone else. Always a good place to start is with a list of topics. Get a new section in your filing cabinet for each or get a folder for each, whatever works best. What are the areas you need to look at? Start a file on each area you are going to work on and organise your finances with everything to hand in one place.
- Credit Cards
Set a week, month or however long you want to tick things off the list. I will go through this list in sequence on each blog to give you some thoughts and guidance.
Anyone who has been to any of my workshops or coaching sessions know I start them with the “Pot of Gold” analogy. Briefly, you have one pot which represents all the money that comes to you in your lifetime through earnings, investment returns, inheritances etc. Whatever the ultimate number in this pot you want to hold onto as much of it for the things you want in life. You do not want to fritter it away on unnecessary spending, interest payments, through waste and mismanagement.
Debt is my favourite challenge and expensive to you if neglected. I am focusing on term loans here and will cover mortgages and credit cards later as they have their own personalities.
First, get to know your debt before making any changes. Don’t do anything until you do this.
Three things are relevant here: term, amount outstanding and interest rate. That is what equals your monthly repayments. Don’t worry about anything else for the moment. In all the years I have coached, advised and mentored people in this area I rarely met someone who knew these to begin with. These three things are the key. Know the interaction between these variables. Go online to a debt calculator like https://www.ccpc.ie/consumers/tools-and-calculators/loan-calculator/ and input your figures. Play around with them.
So, for example, take an outstanding €13,000 car loan at 8% interest and 3 years left to repay. Stick it into the debt calculator and see that you repay €407 pm and the interest you will pay over the three years is nearly €1,700! This is the figure you need to look at reducing. This raises the question of your alternatives to paying this €1,700? The lenders take this money from your pot, but do you have to give it? Do you have some money languishing in an account earning no interest? Is there something you can sell that you don’t need? Can you increase your repayments to pay down this quicker? Is there someone who will lend at a different rate, or none? Debt is necessary for many but not a prerequisite for how you live your life. Being debt free is not an impossibility for and it can be something to drive towards.
For complicated or business debt you may need to bring in someone to help with your situation. Choose this person wisely and make sure they are appropriate for your needs. I always encourage doing as much homework yourself on this.
Define Your Actions
Develop scenarios to try out with the help of the calculators and your personal spending plan. Knowing your personal spending patterns can give you ideas. Can you save on your other outgoings to drive into your debt?
Then define the actions needed.
Be very specific and realistic and bring in a time limit with these actions. The defined goal needs to be clear and only then work backwards on the tasks needed to get there. “Reduce overall monthly spending” is not specific. What about “I will stop buying food in X shop altogether” or “I will set up an increased payment of €x to my loan account before the end of the week” or “I will take €x out of my savings on Friday to pay this down, thereby saving me €1,700 in interest repayments” ? Clear actions will make things clearly motivate you. Also ask are these actions tangible so you can see how to do them and review your progress. I did a previous post on Debt Snowballing which gives some ideas on structuring a repayment strategy: https://www.arrowcoach.ie/2019/07/24/give-your-debts-the-frosty-two-fingers/
Finally, who can help to drive this forward if you need motivation and staying power? Will power is not strong in changing behaviours so having an accountability partner is helpful. Tell your spouse or partner, friends, relatives, advisor or coach what you are doing, and they will hold you to it. You will feel less likely to let your plans slip if you must “report” to someone on progress. Think of having a personal trainer who holds you to your exercise regime. Same principle.
The good thing about money is that it can be counted, and the milestones and timeline can be defined.
This does not need to be drudgery and beans on toast for years. Whatever works for you works. Remember though your pot of gold is finite, and you want to keep as much as possible for the things you want in life.
This is what you are looking to get. That feeling of empowerment, control and clarity about something that you were at the mercy of. The motivation and momentum it will give you will transfer to other areas. Other things you want to do will not seem so impossible. Check out an interesting movement popular in the U.S called Financial Independence Retire Early (FIRE) which is like a supercharged way of saving loads to retire early. It has its faults but there is no denying the energy. Clearing debt can utilise the same principles but it is like coming up from a minus figure to Zero before the saving begins. I will cover this more in the savings blog post.
Good luck with it. Come on!
Next time: Mortgages.