Most of us are no strangers to the term 'secure the bag' right? But how do you secure the bag and what happens when you've got it? How do you ensure that in 2020 you're on top of your financial goals and see your money multiply and bank account flourish? We spoke to Ayo Gabriel, a Private Wealth Advisor about how we can have a financially strong 2020.
How do you set realistic financial goals and keep yourself accountable throughout the year?
Well, the first step is deciding to set yourself actual financial goals! I highlight the word financial here because it is easy to fall into setting qualitative goals that are not always attached to hard quantitative numbers. For example, saying “I’m going to start saving more” or “I’ll start putting money towards a deposit to buy a house” or “I am going to pay off my debts this year”. I categorise these as financial aspirations rather than goals, which are great to have but hard to track or measure.
The key is to shift those statements to: “I am going to have an additional £5,000 in savings by summer” or “I am going to save £20,000 towards a house deposit” or “I am going to spend 25% less on shopping this year”. The numbers will bring your aspirations into perspective and allow for the creation of actual financial goals that you can then measure. Also, once you have a financial goal, try to break it down into monthly chunks. For example, "I want to save £5000 in 10 months, so I’ll need to save £500 each month". Working with monthly numbers will help you quickly match these big goals with your weekly/monthly income and provides a much more effective way to stay on track.
So, how do you decide which numbers are realistic?
First, you need to know how much financial capacity you currently have to reach these goals. I like the idea of treating your personal financial life like you would the finances of a business. In business you create a basic Income Statement which shows your revenues, the costs of making that revenue, then all other operating expenses and from there, how much profit or loss you’re making. We just need to create a similar structure for your personal finances and from there, understand if you are currently overspending or if you already have room to save.
So how do you create this? Here are a few practical steps:
Revenue = Total Income: To start, you should have a good grasp of how much money you expect to come in each month. Hopefully, this is a number you’ll likely already know. Jot this down.
Cost = Costs of Living: Think of this as how much money is currently guaranteed to go out each month, to keep the money coming in. Let’s assume all you did for a month was wake up, work, sleep and nothing else! How much money would have to leave your account to keep this going? This essentially is your rent/mortgage, utility bills, travel costs, food, minimum debt repayments. Surprisingly, the total sum is a number that people often do not already immediately know even though they spend it each month.
Operating Costs = Living Expenses: We all want to live our best lives, but how many of us know how much we are actually spending? Split this into two broad sections:
- A) All extra direct debits you gave (e.g Netflix, Spotify, Gym membership) and
- B) All the rest of your socialisation costs (e.g Going out, Dining, Shopping, Dating etc).
Again, often people do not realise how much their extra direct debits add up to. Not to say you shouldn’t have these, but it is good to know what the total is. For the rest of the spending, go through previous bank statements or use a money budgeting app that can access your transactions (or if you’re in a rush, you can initially approximate this).
Profit/Loss = Capacity to Reach your Financial Goals: With those three totals (1 minus 2 and 3) and you can now see just how much you have left to play with each month. If you’re spending more than you are earning then it’s time to practice cutting back some of that spend, even if you are planning to increase your income in the future.
Now you have your personal Income Statement, you can then combine this with your new financial goals (in monthly amounts) and see just how realistic they are compared to how much you currently have leftover each month. If you’re short, then this process will also help you see where you can cut down spending and/or motivate you to look up extra ways to increase your monthly income.
How do you stay accountable?
I’ll simplify it down to two things:
- Write your financial goals down somewhere you will see them regularly. Put a post-it note on your wardrobe, set yourself a reminder on your phone for every payday…anything! Just make you can regularly be reminded of your goals and how much you need each month.
- Include someone else on your journey; tell a partner or trusted friend the financial goals you have set yourself. You can decide whether you share just your financial aspirations or the actual numbers of your goals. Also, see if you can encourage them to set some financial goals of their own too. The journey is always better when you are both holding each other accountable.
What’s your advice on setting up and maintaining a budget?
One thing I would advise is to begin to work in percentages when setting up a budget. For example, if you want to start saving, decide if you want to save 10%, 20%, 30% etc of your post-tax income, rather than just choosing an amount and running with it. The reason for this is, it is more effective to know how much as a share of your total income is being put aside rather than using a number you may have got from someone else or chosen with considering your other life commitments.
By this point, hopefully you have a good breakdown of your income and also your spending. With that, you should calculate how much you’re spending on each area, as a percentage of income and begin to highlight the areas where you feel you are spending too much. From here you can make sensible allocations to your budget that you will be more likely to maintain going forward. As a final note, leave yourself some room for guilty purchases…having this already factored in will help you hold out when you run into temptation to spend too much or too early.
If you’re not sure how much to allocate – the 50/30/20 rule can be adopted. That’s 50% you spend on all necessary expenses, 30% on things you want and all other extras and 20% on savings or tackling debt.