8 Changes That Will Improve your Personal Finances in 2018
1) Be aware of your money
Most people don't know how much money goes into and out of their bank account every week; at times I don't. When I don't, it's normally because I'm scared to look at my account. It's fear of the unknown; I've been on a large shopping binge and I know I've spent a lot. I really don't want to quantify what "a lot" is, and so I ignore my bank balance for several days (more likely weeks).
On the times, that I do check my account, it often prompts me to then spend my money a little more wisely in the following weeks. I'm not saying you should track every penny coming in and out of your account, but having an awareness of your cash balance means you are more mindful of your finances, and thus financial goals. By consciously knowing about your finances, you make conscious decisions on how to spend your money.
2) Make saving and investing subconscious
To be frank, I'm terrible at saving when I put my mind to it. For some reason, when I decide to save really hard for something, my money tends to fly out of my bank account; my social calendar suddenly gets busy, every appliance in my flat breaks, and all my bills hit me at once.
When I set everything up automatically, and then ignore it, I tend to save very well.
Automatic ways to save money are the best. As I previously detailed in my blog (3 Quick Saving Strategies), saving money can be super simple; just don't think about it. Literally. Set up the standing order from your current account into your savings account, or for overpayments on your mortgage, or into a stocks and shares ISA (or do all three), and then leave it. Come back in a a couple of months or a year, and see how much your savings have increased by.
3) Investments; you're in it for the long term
As Warren Buffett (one of the greatest investors ) stated in a CNBC interview "I don't know what will happen in a day, or a year; I never felt it was important. Over the long term, markets will go up".
Lock your money up for the long term; this is where you'll see the returns. Trying to predict the market involves using human judgement. As I've written about previously, we humans, whether we like it or not, are biased subconsciously on what we do. In investment terms, this usually results in losses...sooooo....leave your money alone.
4) Find something in your personal finances that interests you
As any good economist will tell you, you need to hold a diversified portfolio of assets (i.e stocks, pension, assets, ISAs, property across different geographies, industries etc). Having a diversified portfolio means that while one asset is decreasing, another may be increasing. Over time (per point 3), this diversified portfolio will increase in value.
While it's fun to watch your diversified portfolio increase in value over time, I also have some "emotional assets"; this probably goes against what most people will state on personal investments. I physically pick the companies I want to invest in, rather than spreading my risk. These "emotional assets" are stocks I hold in companies that I really like, or I like the industry. For me, renewable energy, battery power and electric cars are all industries I believe will see a significant upward turn over the next 5 years, and therefore I pick shares in them. On the flip side, I also have "emotional shares" in a couple of companies, that I see as fun, or I use the brand regularly *cough* makeup brands *cough*.
I hold these "emotional stocks" to help keep me invested in my personal finances. Following my personal stocks means I read more extensively; I become exposed to new ideas, industries, economists etc. I keep learning, and stay interested.
5) Clear Debt First
Debt usually has associated interest payments. Interest payments are money paid over to financial institutions, and is effectively their profit. I call this money "dead money"; it's dead as you are not getting anything in return. When you make capital repayments to the lender on your car financing plan, or mortgage, you are paying off the asset, so that you eventually own it. Interest repayments on credit cards, overdrafts and bank loans tend to be dead money.
Pay off your debt with your savings (although make sure you have enough to live on, and emergency funds); interest earned on savings accounts are much less than interest spent on debt.
6) Cash is King
Again the good economist will tell you that you should not have more than 4 times your salary sat in a bank account due to inflation and the devaluation of your money (blog coming on that very soon)...that's great, and true. HOWEVER, I like having money that I can access immediately. Money gives me options, and bails me out in emergency situations such as my boiler breaking (yes again), or when my car starts making obscure noises and needs to be taken to the garage...keep a pool of cash available to you.
7) Invest in You
Stocks and shares, bonds, ISAs etc are all great, but your greatest asset is you. Invest in you and furthering your knowledge in what interests and excites you, and what you want to learn.
Do we all need to MBAs from Harvard at $100k a pop? No. I recently started learning a language, and I'd like to take a course in negotiation (because I'm terrible at it); yes, it costs me money, but it is an investment in me, my career, and my future. I will hopefully see return from that skill further down the line.
8) Things Make you Poor
The consumption of things makes you poor. Fact. Spending money on assets that decrease over time, is literally pouring your money into items that have no future value. I wrote about it in my blog "Items Make You Poorer"; my 2018 mission is to buy a lot less "stuff", being clothes, make up, shoes, cycling gadgets etc. Experiences and learning I will continual to spend money on, as per, point 7, that is an investment in me.
My New Years Resolution for 2018 is only to buy an item if I sell another item I own (i.e, I can buy that new pair of skis if I can make that money through selling the wardrobe full of crap I no longer use).
So, armed with these 8 changes, here's to a happy and prosperous New Year.
As always, I love comments. Let me know how you intend to improve your personal finances in 2018.
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