Plenty of us will be glad to see the back of 2020, as Covid-19 wrecked so many carefully laid plans, not least the financial ones.
Many who started the year in good financial shape will not be feeling so confident today, while those who already faced financial difficulties may have found that the pandemic made them worse.
Next year should be better for the global economy, provided vaccines can see off the mutant Covid-19 strains, and that gives you an opportunity to recover your finances and end 2021 in a better state than you started it.
If there is one thing the pandemic has taught us, it is that you need to prepare for the unexpected. Here’s how to put your money into recovery mode.
The New Year is time to start anew, and now is the ideal time to view your spending and income patterns in a fresh light.
If you are spending beyond your means, you need a step-by-step plan to bring everything back into line, says Georgina Howard, chartered financial planner at The Fry Group.
The first step is to get an accurate picture of where you stand right now. This may take a bit of legwork, but it’s worth it.
“First, gather your bank and credit card statements for the past 12 months, then work through them to see exactly where your money goes. Then, separate them into essential spending and non-essential spending. Don’t leave anything out. This will reveal where you can make cutbacks and reduce your costs,” Ms Howard says.
You could reduce spending on essentials, for example, by shopping around for cheaper car, home or health insurance, or a cheaper mortgage or other form of credit. “You could cut back on your food spending by drawing up a shopping list and sticking to it, or doing some of your shopping at a cheaper supermarket,” she says.
Your next step is to cut back on frivolous spending, says Stuart Ritchie, director of wealth advice at AES. “It’s so easy to get caught up in the luxury lifestyle in Dubai, but all those weekly brunches, weekend shopping, takeaways, beach and pool days, and staycations add up. Think how much you spend on these every month. Then work out how much of that you could be saving instead.”
If that doesn’t bring your spending and earnings back into balance, or your debts are running out of control, you need to focus your efforts on paying them down.
Debt comes in two types: expensive short-term debt, such as credit cards, and cheap long-term debt, such as a mortgage, says Demos Kyprianou, a board member of SimplyFI, a non-profit community of personal finance and investing enthusiasts in Dubai.
“As a rule, expensive debt is where you pay interest at 5 per cent a year or more, while cheap debt is 4 per cent or less. If you have a lot of expensive debt, focus your efforts on paying that off first. If it spirals out of control, it can be devastating, both financially and psychologically,” says Mr Kyprianou.
Once you have cleared your most expensive short-term debt, move onto the next most expensive, then the next, a process financial professionals called “snowballing”.
Many will now find themselves in a tough position after this difficult year, so there is no shame in seeking support, says Ms Howard. “If you have problems servicing a mortgage or other debt, talk to your lender to see if they can they give you relief, or seek financial advice from a professional adviser.”
Whatever you do, don’t stick your head in the sand. The sooner you face up to your debts, the better because they won’t just go away.
Once you have your debts in hand, Mr Kyprianou says start building an emergency fund equivalent to six to nine months’ worth of basic expenses, held in an offshore account with easy access, to prepare for any future crisis. “Ideally, you should have built this up during the good times, but you can still try to build it now.”
Once you have done that, Mr Ritchie says look to the future and start building up longer-term savings to fund your retirement. Otherwise you are only pushing today’s financial worries further down the line.
Mr Ritchie recommends applying what he calls the 50/30/20 rule to your salary. “This means that 50 per cent goes on meeting your essential needs, 30 per cent on your wants, in other words, enjoying yourself, and the final 20 per cent on your savings.”
This formula can highlight where you are overspending, and how to put it right. “It works whether you are young or old, a higher-earner or middle-income household, and wherever you are in the world,” he says.
Make saving money the first thing you do when you are paid, then spend what is left, not the other way around. “Choose an automatic investment plan that deducts the money from your account or salary before you’re tempted to spend it,” Mr Ritchie says.
Investing every month has two further advantages. First, it removes the danger of paying in a single big lump sum only to see the stock market crash the next day, and second, you actually benefit when share prices fall because your regular monthly payment will pick up more stock at the lower price. This helps you turn a short-term crash or correction to your advantage, which means you might even welcome the odd market sell-off.
Many people are wary of investing in today’s volatile stock markets, but the biggest mistake you can make is failing to invest at all.
Buying shares will not make you rich overnight, but build your wealth steadily over your working lifetime through the power of compounding, Mr Ritchie says. “That means there is literally no better time to start investing than today.”
Do not take undue risks, but spread your money between mutual funds or exchange-traded funds (ETFs) covering different regions, sectors and markets, with exposure to other asset classes such as bonds, property, gold, commodities and even Bitcoin (but don’t get carried away). “If markets crash today, tomorrow or next year, a diversified portfolio will act as a cushion to soften the blow,” says Mr Ritchie.
He says you should look at other ways to make your money work harder. “If you are renting, you are lining somebody else’s pockets, and depleting your own. If you see yourself living in the same city for at least five years, buying is a good idea. Your monthly repayments may be lower than your rent and if you move, you can sell and possibly bank a profit on the transaction, too.”
You should also consider protecting your loved ones with life insurance in case you die, and critical illness, which pays a lump sum if you suffer one of a list of serious health problems, such as cancer, heart attack or stroke, Mr Kyprianou says.
He suggests another way of bringing your finances into balance. “Work on your career and improve your qualifications, as this can lead to promotions or a better paying job.”
Loyalty does not always pay in the workplace, as your salary may rise at a slower rate. “Sometimes it pays to move on,” Mr Kyprianou says.
We all want to move on from a difficult 2020, but your finances will not recover on their own. The New Year is a great time to draw up a plan, then make sure you stick with it.