New Year Resolutions - Take the five steps to really keep up those resolutions - Sarah Coles

The New Year is a time for optimism, and making plans to put our finances right.

It’s only a couple of weeks later that it usually becomes a time for dismal disappointment and failure. But this year doesn’t have to be the same as every other, because instead of making wildly optimistic resolutions and crossing your fingers, you can use the five-step approach to becoming the kind of smug person who manages to stick to them.

Step 1

Start with one, realistic, goal. When we promise to radically transform our finances and change everything at once, we’re essentially dooming ourselves to failure. Change is hard, so don’t try to do too much.

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Sarah Coles is a Senior Personal Finance Analyst at Hargreaves LansdownSarah Coles is a Senior Personal Finance Analyst at Hargreaves Lansdown
Sarah Coles is a Senior Personal Finance Analyst at Hargreaves Lansdown

Our research shows that the most common financial resolution is to pay off debt, which one in five people want to get sorted (20%). If you have expensive short-term debts, this should be your priority.

If you don’t have expensive debts to worry about, and you have people who rely on you, then your first job should be to look at protecting them if something should happen to you. This should include life insurance, and it’s worth considering insuring your income if you’re too ill to work too.

If you’ve sorted protection, savings should be next in line – both an emergency savings safety net of 3-6 months’ worth of essential expenses, and saving for the future. Our research showed that paying more into savings was the third most popular resolution.

Step 2

Next, nail down exactly what needs to be done. Spend some time working out where you stand right now. This can be a scary process, especially if you’ve never calculated exactly how much debt you have, or tracked down all your pension statements to see how much you’ve put aside for retirement.

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Then work out where you need to be. If you’re not sure what you’re aiming for, there are some useful rules of thumb. So, for example, your emergency savings safety net should be big enough to cover 3-6 months’ worth of essential expenses if you’re working age.

In pension terms, the Pensions and Lifetime Savings Association has some useful guidance around how much income you might need in retirement. It says for a moderate retirement a single person needs £20,800 (including their state pension), and for a more comfortable one they need £33,600. And when you’re working out how much you need in your pension pot in order to generate these sums, if you plan to draw the income generated from your pension, it’s not unreasonable to work on the basis that you might be able to take 4% of the pot a year (although the actual amount you can take will vary depending on the income produced).

I’m not going to lie, some of the figures are going to be pretty off-putting, which brings me to step 3.

Step 3

Don’t give up. If your goal is miles off, it can be tempting to chuck it all in. If at any stage, this starts to get overwhelming, get some help rather than giving up. If you need help controlling your debts, you can approach a debt charity like Stepchange. If you need help with other aspects of your finances, there’s plenty of information online including the Money Helper website.

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Otherwise, the key is to do what you can afford, whenever you can afford to do it. You don’t need to transform your finances overnight. The secret is to build slowly towards your targets. If you’re wondering how on earth to do that, this is where step 4 comes in.

Step 4

Spare an hour to draw up a household budget. I know it’s boring, and I know most people go through life without ever going anywhere near one, but it’s the single most powerful thing you can do in order to get on top of your finances.

Start with what you spend, which can either mean keeping a spending diary for a while, looking through your banking app to see what you’re spending and where, or going back over old bank statements.

You need to put this into a budget tool, along with your income There are lots of them online, and one of the most comprehensive is on the website. You can play with the figures to see what kind of cuts you need to make – and where – in order to free up a chunk of money each month.

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Part of this process means seeing if you can cut the cost of some of your bills, which our research shows is the second most common resolution, planned by 17% of people. Unfortunately, right now, there just aren’t any cheaper energy deals than the price cap, but you can still shop around for everything from mobile phone contracts to media and broadband. Make a date in your diary to check energy deals on a monthly basis for now too, because the cap is set to go up steeply in April, and if a decent deal comes up between now and then you need to be on it in a flash.

Step 5

Use the cash you free up to target your top priority. If you have debts, see if you can switch them somewhere less expensive, so more of your monthly payments can go into paying them off. Then with the extra cash you have freed up, set up a monthly direct debit on payday to pay them down as quickly as possible. The direct debit element is key here. You don’t want to have to remember to do the right thing every month.

When the debts are paid off, you should have more extra cash in your budget, which you can use to buy any insurance cover you need to protect your family. You can also redirect part of your monthly direct debit into a savings account, to build up emergency savings, and part into your pension to make up any shortfall.

Once you’ve done the hard work, and set up your direct debits, all that’s left to do is revel in the smug satisfaction that comes with the knowledge that you’ve beaten the odds to become the one in a million who actually stuck to their resolution this year.

Couples and money rows

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Millions of money rows are unfolding around the country, because so many of us don’t see eye-to-eye with our partners when it comes to money. Our research shows that fewer than two in three couples say they have the same financial priorities.

One in ten say they’re better at saving for the future than their other half, and one in 14 say their partner spends too much. One in 20 say they want to spend more, and one in 20 say one of them is more ambitious than the other.

Having different approaches can cause all kinds of arguments, but you don’t need to be identical in order to find a way to work together. It just means having honest conversations about what you want in life, and finding the solutions that work for you.

Unfortunately, it appears that an awful of people haven’t had these conversations. More than one in ten people have no idea whether they share the same financial priorities as their partner. And this isn’t just young people not having got round to it: the group who are least likely to know are those aged 35-54.

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