Spring is in the air! The days are getting longer and the weather is getting warmer. Spring is traditionally a time for cleaning out the house, and getting rid of the dust and cobwebs of winter. It’s time to get rid of what no longer serves us and make room for the new. But it may not just be your home that needs a spring clean. When did you last take a proper look at your financial position? If it’s been a while, its quite likely that your finances need a spring clean too.
So where to start on spring cleaning your finances?
Here are 7 steps to help spring clean your finances. Ditch any bad money habits and set up good new ones.
- Check your cashflow
- Plug any money leaks
- Work out your net worth
- Find your financial freedom figure
- Create a budget
- Ditch your debt
- Set up good money habits
Lets look in more detail at each of these
1. Check your Cashflow
You can’t improve what you don’t measure, so the first step in a financial spring clean should be to get an accurate picture of where you currently are. If you already track this, fantastic! Have a gold star and move on to the next step. For many of us though, this first step may be tricky.
Gather all your financial data in one place. Do you have many savings, checking, personal and joint accounts? Having lots of accounts can be useful if you are using them strategically to compartmentalise your money. Or it can be a nightmare as they can become overwhelming to keep track of.
If you have many accounts take a look at whether you actually need them all. There may also be fees associated with these accounts. You could eliminate some fees by closing some of your accounts and simplifying your banking. A way of categorising your money without having to open lots of separate accounts is to use one account that allows you to set up separate categories within it. Starling lets you do exactly this.
Keeping tabs on your expenses lets you see where the majority of your money is going.
There are apps you can use, you could use a simple spreadsheet or you can even track this on paper.
If you have a regular salary from one employer it should be easy to keep tabs on your income. However, if you are self-employed or run your own business this can become a lot more complicated. In this case, you will want to make sure that any income or expenses related to the business are coming and going from a separate account. Do not mix them in with your personal expenses. Trust me, I know. Once they become mixed in it can cause an accounting nightmare.
Before you draw your own salary from your business you’ll want to review the income and expenses for the business to make sure that the business can afford to pay you. Always leave some money in the business to cover any unexpected costs or seasonal fluctuations in income.
2. Plug any Money Leaks
You’ll be amazed at how much money is wasted each year on unused subscriptions.
This is Money says “Britons waste a collective £25billion each year by paying for subscriptions they don’t use or want”.
The biggest culprits are gym memberships (no surprise there!), mobile phone contracts and video streaming services like Netflix and Amazon Prime.
Other money leaks are magazine subscriptions to magazines you no longer read, club memberships you may not be using, and fees for services that you could get for free.
Check that any warranties and insurances are still relevant too. You may find yourself paying for a warranty on something you no longer own!
So dig through those bank statements and make sure that all the direct debits are for things you actually use and you could find yourself saving hundreds of pounds.
For more money-saving tips check out this post, 21 Things to Stop Buying to Save Money Fast.
3. Work out your net worth
Net worth is just for billionaires, right? Well, no, actually everyone has a net worth, and knowing yours is a key step on the road to financial security.
What is net worth?
Net worth is simply the sum of all that you own, minus all that you owe.
You may think that you are doing well financially if you have a good income. However, if your debts are higher in value than your assets then you are trapped in having to work to pay off your debts. So net worth is a great measure of how you are doing financially.
To calculate your net worth add up the value of all of the major assets that you own. This would include your home, your car, any investments that you hold, cash, money in retirement funds. It could even include art or jewellery if these are valuable enough to turn into cash.
To work out the value of your home, you could get an estimate from a site like Mouseprice.com, which will show you recent sales in the area. You can check the asking prices of current properties on the market (but remember that the asking price may not be the price they sell for) on property portals like Zoopla.com and Rightmove.com or check with local estate agents.
For a valuation of your car you can get an idea from Autotrader. You may need to check auction houses if you are also counting the value of investment purchases like art.
Once you’ve added up all your assets, take a look at your liabilities.
These will include your mortgage balance, any car loans, personal loans, student loans and credit cards. Add all these together for a total sum of your liabilities.
Then you can simply subtract your liabilities from your assets to get your net worth figure.
It’s totally possible to have a negative net worth. In fact, if you have bought your home fairly recently with a mortgage then it is very likely that your net worth will be negative. This may not be a bad thing as a home is going to gain in value and with it your net worth.
What you will want to be mindful of is keeping tabs on this net worth figure and make sure it is increasing, as this is the measurement of your true wealth.
It’s also possible to have a high net worth figure and still be short of cash. This may happen if you have invested in assets for the future, and your income has dropped. In this case, you’ll be looking at increasing your income to cover expenses so you don’t end up having to cash out assets to cover your living costs.
4. Identify your financial freedom figure
You may have heard of the “FIRE” movement. Fire stands for financially independent, retire early.
People on this journey have a goal of replacing their salary with income from investments so that they can retire early from their jobs. However, what you may not have considered is that we are all on the journey to financial freedom, whether we know it or not.
At some point in our lives, if we are lucky enough to live to a ripe old age, we will be too old to work and we will need an income to support us that doesn’t come from earnings. This may come in the form of a state pension, pension from employment, investments or government benefits. How many resources we have amassed by then will determine our quality of life.
So as you will at some point stop generating an earned income. And you should have a plan for when you’d like that to be, and how much money you need to support the lifestyle you want to live at that point.
If your only income plan is living on what the government provides, be ready for a very meagre retirement.
For good quality of life in your golden years you need to be planning ahead, and the earlier you can start the better.
Christina and Aman at Our Rich Journey go into a lot of detail on the steps they took to retire early. Check out their YouTube channel HERE.
5. Create a budget
The next step to spring clean your finances is to create a budget. A budget is simply a plan for your money.
Budgets can be super detailed, with a plan for every penny, or they can be much more general with broad categories for your spending. There is no right or wrong way, there is only what works for you. The starting point for your budget will be the income and expense spreadsheet you (hopefully!) prepared earlier. (Didn’t do that yet? This is a reminder to do it now. 🙂)
Take a look at your expenses to see if you are happy with your current spending. If so, you can enter these amounts in your budget.
Now take a look at your financial freedom figure. How much should you be saving each month to get there? Where are you going to save this money?
It could be savings accounts, investment accounts, stocks and shares, property or other assets. Regardless of how you are going to save, the first step is to have a plan.
6. Ditch your debt
Your savings plan will quickly run aground if your potential savings are disappearing towards debt.
Saving while having debts is like trying to fill a bucket with a hole in it. And in fact, if you are paying high-interest rates on your debts, it can be like pouring money directly down the drain. As unfortunately, the interest rates on debt are often a lot higher than the interest you will earn on savings.
So a key part of your financial plan needs to be getting rid of debt.
Take a look at what you owe and your income and expenses. Do you have any money left over at the end of the month? If so, this should be going towards overpaying on your debts.
The faster you can get rid of your debts, the faster you will be able to build your net worth.
To tackle your debts strategically and pay them off in the fastest way possible check out my simple mini-course, Debt Free the Easy Way.
7. Set up good money habits
The financial spring cleaning tips here will give you a picture of your financial health and help you move towards your goals.
You won’t just want to do this once and forget about it though. You’ll want to keep checking these metrics on a regular basis.
Some, like your financial freedom figure, won’t change very often. So you may just want to put a date in your diary to review this on an annual basis, or if a big life change comes along like the birth of a child or a new relationship.
Others, like your income and expenses, can change a lot quicker. You should be checking this at least monthly to make sure that you are aware of your cashflow and on track with your goals.
If reviewing your finances feels about as fun as a trip to the dentist, see if there are any steps you can take to make it more fun so you are more likely to do it regularly.
Here are a few tips to make a money review more fun:
⏰ Schedule it in.
It’s easy to forget to check our finances as it’s not something that is required daily. But it’s easy to put off till we need to make an application for something like a mortgage. Put a date in your diary and make sure to block off enough time to get this done.
📝 Have a specific plan.
I don’t know about you, but when I have a very general direction, like “check finances” I tend to forget exactly what needs checking and end up not doing it. So set yourself a specific task list and make sure you have all the relevant tools, like login details, to hand.
🍷 Team this with something fun or a reward afterwards.
Think about how you can make finances more fun. Perhaps you make this your pizza night, you pour yourself a glass of wine, light some candles or put on your favourite music. If you can create pleasant associations with tracking your money you are far more likely to do it.
📈 Track your progress.
When checking your accounts you are just looking at numbers on a page, which may not feel very fun. So equate the numbers with a pleasant reward. You may have a savings goal for a holiday or luxury item. Use this opportunity to visually show how close you are getting to your goal.
📝 I’d love to hear from you. Let me know in the comments which of these 7 tips you already do!
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