It's hard to put 2020 to words, as it had all sorts of drama and disruption in store. The Covid-19 pandemic was tough on many people's finances, and the troubles could continue well into 2021. Even if the pandemic continues to disrupt your job, you can still manage your finances with budgeting. The New Year is a great time to get your finances under control. What are the smart financial resolutions to make in 2021? Here are five financial resolutions to improve your budgeting next year and beyond.
1. “I’ll manage my debt with the 50/30/20 rule”
Managing your debt is a significant part of budgeting. It's hard to stick to a budget if you are constantly accumulating more debt. If you have outstanding debts, then you want to make 2021 the year you tackle them for good.
The 50/30/20 budgeting rule is a great tool to use next year. US senator Elizabeth Warren popularised the rule when she was a bankruptcy specialist at Harvard. According to the budgeting method, you should aim to split your income as follows:
- Allocate 50% to your essential needs. This includes all fixed costs like utility bills and mortgage repayments. It also covers essential food shopping and transportation you need to work, for example. You should also include any minimum repayments on debts as essential expenses.
- Allocate 30% to your wants. These are expenses that are not mandatory but cover things you want to do, such as eating out or going on holiday.
- Allocate 20% towards saving. This is money you can set aside or make extra payments on your outstanding debts.
As you can see, you should include any minimum debt repayments on your essential needs. However, don't settle for paying the bare minimum on credit cards if you can help it. You'll do little more than clear the interest each month! You also need to make sure you're not clearing a debt and immediately reaccumulating it. Try to clear debts as quickly as possible! Allocate most of the 20% for your savings towards paying your debt first before you start putting cash into a savings account. You don't want to get into debt to pay off old debt so having a savings buffer is vital in the long-term. Still, in most circumstances, you should aim to clear debts first as a priority.
2. “I’ll add two new money-saving habits”
You need to be mindful of your spending if you want to save 20% of your income. It might not seem much, but it can take quite a chunk out of your budget. It's easy to slip up from your saving goals if you're not careful.
Saving shouldn’t be a complicated and challenging exercise. It's a lot easier to make saving a reality if you adopt money-saving habits. There are several good ideas you can try; the key is finding those that work for you. Here are a few great examples of money-saving routines:
- Sell any clothes or items you have but don’t use
- Buy second-hand clothes and books instead of always shopping for new products
- Have one day every month where you don't spend any money at all, other than any fixed and essential costs
- Cancel subscriptions you don’t use
- Use a money-saving app that rounds your shopping and adds the extra on your savings account
- Gift experiences or homemade gifts to loved ones in 2021
You can test different habits in January and then implement those that feel the easiest to follow for the rest of the year. You can even pick a different two for each month to make it more varied.
3. “I’ll start learning more about money”
If you want to master budgeting for good, financial knowledge is essential. You might have a good grasp of the basics already. But information continually changes and updates, so updating your financial knowledge and looking for new ways to manage your money is always a good idea. You are never too old to start, either!
You can improve your financial education in fun and straightforward ways. It is easy to access information these days. You could do the following:
- Read books on interesting financial topics
- Listen to personal finance podcasts
- Subscribe to a financial newspaper
- Follow blogs and news on topics like investing, saving and budgeting
4. “I’ll get on top of my pension”
Budgeting is always about looking forward, and your retirement is one of the most significant financial events in your life. If you are planning to retire in a few years, you have to sort out your pension.
The most important thing to do is understand what kind of pension you are getting. The UK state pension has been through many tweaks in recent years. Ensure you know how they impact on you. You should also look into any private pension you have and calculate an actual estimate of how much your total pension will be.
Compare your pension estimate to your current spending. If you are going to make a lot less, then you want to start figuring out how to cover the difference. You'll want to look at ways to boost your pension contributions to grow the money you make on retirement. Start saving towards a pension now to ensure a happier retirement.
5. “I’ll regularly review my budget”
It's not enough to create a budget at the start of the year and then only give it a glance throughout the year. If 2020 has taught us anything, it's that things can change. Your financial situation won't be the same every month, and therefore, it's a good idea to keep reviewing your plans.
Make sure you review your budget monthly. When reviewing pay attention to how your spending and income might have changed. You also want to think if your financial goals have changed. Perhaps you've decided to move, and you should start saving money for it. Reflecting on your current situation is an excellent way to ensure your budget always works for you.
Budgeting for a better 2021
The past year has been long and challenging. Your financial realities and priorities might have changed. It's a good idea to approach 2021 with a new, fresh mindset. You want to improve your budgeting to ensure you build a strong foundation for the future. The above five financial resolutions will help you make your budget work for you. You'll gain more financial knowledge, prioritise the most important parts of budgeting and improve your financial health. Now it's time to put the resolutions to work and have an excellent financial year in 2021!