The new year is well underway and while your exercise and healthy eating plans might be faltering, now is a great time to start a financial detox.
The process for a monetary cleanse is similar to that used for your mind and body. So, too, are the techniques for making sure the changes stick.
Committing to any form of detox is a great start. It means you’re putting aside time and mental space to think about yourself. The next step is to take an overarching look at the area you’re cleansing. Understand what it is you are trying to achieve, and identify the areas where bad habits have formed or where costly mistakes are being made.
Once you’ve highlighted your problem areas the detox can begin, replacing bad practice with good, and repeating until positive habits form.
Keep reading for your five-step financial detox guide.
1. Revisit your budget and understand your cashflow
Cashflow modelling is an important tool in financial planning. And while you might not have sophisticated software to track your spending or the impact of saving on your long-term wealth, you can easily track your daily expenditure.
Make a list of all your incomings and outgoings to understand how much money is coming in each month, and where that money is going.
This simple exercise is great for highlighting bad habits, rediscovering long-forgotten subscriptions, and calculating the disposable income you have each month.
2. Cut discretionary spending
If you have less disposable income than you thought, or the money you have is being channelled into the wrong areas, now is the time to make a change.
Your cashflow model should’ve allowed you to see the combined cost of your discretionary spending, whether on takeaway food, restaurant bills, or subscription services.
Cutting down on your discretionary spending should be the first action of your 2022 detox plan.
You might cancel unused subscriptions, switch to a less expensive phone contract, or plan your weekly shop and dinner menu in advance to remove the temptation of fast food.
3. Pay your future self first
Paying your future self first means paying household bills and saving for your future – through your pension and other savings and investments – and then budgeting with what remains.
This ensures that even when times are hard, you are building an emergency fund with your bank and contributing to the comfortable retirement you have always dreamed of.
One budgeting technique you might consider is called the “50/30/20 rule”. You’ll need to put aside 50% of your monthly income for needs such as bills and mortgage payments, 30% for wants, and 20% for savings and investments, or for paying off debt.
If you find that your financial detox increases your discretionary expenditure, consider increasing your pension contributions or paying off debt, rather than seeing it as disposable income. The same goes for work bonuses or pay rises.
Placing any additional funds straight into a pension or investment means that you won’t miss the extra money in the present, but it will be contributing to your future wealth.
4. Manage your debt
Any debt – especially high-interest debt – that you have, can increase your regular, fixed expenses and eat into the disposable income you have.
Tackling this will improve your overall financial position over time, making you better placed to pay your future self first, and increasing your affordable discretionary expenditure.
Taking debt into retirement can be particularly damaging. Your hard-earned retirement income will be eaten into by interest on debt, rather than helping you to live your dream retirement.
If your cashflow modelling and detox budget hasn’t made clearing your debt any easier, speak to us and we can help you put an affordable plan in place.
5. Talk to your loved ones
As with any lifestyle change, talking about your plans with loved ones can be a huge help. Not only does it provide accountability – the more people that know about your plans, the more people you’ll have to answer to if they fail – but you can also share your worries.
If you worry that you’ll struggle to give some things up, ensuring loved ones understand your struggle will prevent them from leading you off track. If you’re swapping nights out for nights in, speaking to your friends about this first means they can provide support.
If your issues are with managing debt or you are concerned about the size of your potential pension pot at retirement, speaking to a professional is probably the better option. Remember that we are always here to help.
Get in touch
If you’d like help completing your financial detox this year, please get in touch. Email info@lloydosullivan.co.uk or call 020 8941 9779.
Please don’t hesitate to share this article with your friends and family, or anyone else who you think might benefit.
Please note:
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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