Finance December 2014

To Financial Freedom

A 12-step guide to tackling your money worries

  • Set goals and prepare for financial emergencies
  • Track spending, be a good shopper to stay in the black
  • Automate finances, particularly direct debits, standing orders

Given this is the December issue, it might be appropriate to use the analogy of the Twelve Days of Christmas, albeit swapping the Christmas aspect for a financial one.

No doubt you are all focused on holiday plans, gifts, great food and spending time with friends and family.

However, it is worth remembering why, and for what, you work as hard as you do throughout the year. Ultimately, it is to achieve financial freedom at some point in the future.

1. Goals
You must set yourself financial goals if you are to become financially free. Most important, these goals should be personal and have meaning. Stay focused, be disciplined and be accountable.

2. Track everything you spend for one month
Given that we are creatures of habit, if you are disciplined for a month, the chances are you will maintain your self-control. By tracking where your money goes, you can account for what is wasted and what is used productively.

3. Develop a budget
Some 55% of millionaires have a budget, and you must do so too. While this might seem an obvious statement, most people lack a budget and, therefore, spend more than they earn.

By keeping both a budget and a record of your spending you should be able to end the month—and year—with your account in the black, rather than the red.

4. Review outgoings on an annual basis
You should review how much you are paying for utilities, credit cards, insurance, pensions and retirement plans.

This is hardly exciting—particularly after the Christmas and New Year hangover—but it is necessary, if you are to achieve your goals.

5. Consolidate your assets
How many bank accounts, investment accounts and credit cards do you have, compared with how many you need? A useful exercise would be to review all of your accounts and consolidate where necessary.

6. Have an emergency fund
This is the basis of any robust financial plan and, typically, one should keep three to six months’ salary on deposit. Although in the current environment, the money will not earn anything, remember that it is for use in emergencies.

There is no problem with dipping into the pot from time to time, as long as you replenish the funds as soon as is practical.

7. Reduce debt
Unsecured debt, whether on credit cards or loans, should be cleared as soon as possible. Only when this is done can you really start adding to your balance sheet in the form of savings, investments, pensions and future planning.

8. Start your retirement planning immediately
Regardless of how young you are, the need to start planning for your later years cannot be stressed enough.

Many take the view that firm or government pension systems will no longer provide anywhere near enough for our autumn years.

Therefore, we all as individuals should be saving—as a minimum sum—20% of our take-home pay. If you are not, then you are setting yourself up to fail. The old cliché rings true: fail to plan, plan to fail.

9. Automate your finances
Although perhaps not so easy in Japan, particularly with regard to direct debits and bank standing orders, where possible you should arrange for all your outgoings to be deducted from your bank account on a monthly basis, including your retirement plan.

10. Earn extra money
There are so many ways to increase the amount you earn. Use your imagination, be creative and have fun.

11. Become a conscious spender
Life is for living, but next time you consider buying something, ask yourself if you really need the item you are thinking of buying.

People buy based on emotions, reflex, even on a whim. Will the purchase take you toward your goals? If not, it will take you away from them; there is no midway point.

12. Now is the time to take control of your finances
Educate yourself. A good idea would be to take a day, sit alone and review your finances. Employ an accountant, a financial advisor or a lawyer when necessary to help guide you through the more technical parts of a financial plan.

The good news is you can reduce your debt, save for your retirement and put your children through university if you wish. However, you need to start planning today.

The above 12 steps provide a useful reminder of some of the simple things we can do to ensure we reach our financial goals. On that note, may I wish you a very happy Christmas and a prosperous New Year.