How to reset your finances for the new year

With the new year rolling in, you may have resolutions to improve your financial status in the months to come. You can kickstart this by reviewing and resetting your finances.

We look at reasons why you should assess your finances annually, we find out what “zero-based budgeting” is, and we look at three aspects you should consider when reviewing your money.

Tip: Get your debt organised for the new year. Start debt consolidation.

Why should you review your finances?

Richard Bray, head of strategy at Amplify Investment Partners, says that the market volatility and financial shocks of the last couple of years are a glaring reminder of the critical importance of reviewing your finances and savings goals regularly.

“The start of the year provides the perfect impetus to reflect on your budget and savings strategies, to re-examine your savings options, and to take further steps to increase your savings,” says Bray.

He explains that it’s the perfect time to review your savings strategy, which will help you weather future storms and make the most of sunny days.

“The new year is an opportunity to start preparing for a better future, taking the lessons you’ve learned to change what you value and act on that change,” says Bray.

READ MORE: Should you be taxed on your end of year bonus?

Assess your finances with “zero-based budgeting”

Sheldon Friedericksen, CFO of Fedgroup, says that you should use “zero-based budgeting” to reset your finances for the new year.

“Start by identifying what cannot change, and then assess and add the expenses that deliver the most value to your life. It’s important to look at the utility of the expenses, and then separately assess how you’re benefiting from them,” says Friedericksen.

“For example, let’s consider a car. It provides you with transport, which allows you to move from point A to point B. Many cars can provide this, and they all have a number of characteristics and cost implications, such as repayments, insurance, fuel consumption, and safety,” says Friedericksen.

“However, in the end its function boils down to transport. Doing a zero-based budget enables you to reassess whether the expense of your car is delivering this commensurate value to you,” he explains.

Friedericksen believes that this approach will enable you to take a hard look at less value-laden expenses, and allow you to cut or reduce these costs.

“This will allow you to create further disposable income that can be invested, saved, or used to pay off expensive forms of debt,” says Friedericksen.

READ MORE: Are you at risk of inheriting your sibling’s debt?

Get ready for the new year

Once your zero-based budgeting is complete, you can further review your finances for the new year. Consider the following points when making your assessments:

1. Budget for unexpected expenses by keeping an emergency fund

“Many people don’t keep emergency funds, and if they lose their jobs or their businesses don’t do well, they are forced into knee-jerk reactions and they sell their investments at the worst times,” says Bray.

He explains that an emergency fund of approximately three months’ income will help mitigate the need to cash out during these times, and you will avoid a substantial loss.

“We saw this during February and March last year where people had to encash their investments at a substantial loss, but the recovery was sharp and resulted in higher market levels. If they had three months’ worth of salary in cash, they may have been able to ride it out,” says Bray.

He believes that if you can give yourself a bridge of a few months, you will not make a huge financial mistake and your long-term investments will remain intact.

2. Start saving, but with a purpose

Brays says that if you know you are saving for a goal or purpose, you will be reluctant to sell out and you will have a more level-headed and longer-term approach to your investments.

“The pandemic has forced us to think about the economy we want to rebuild, and investors are increasingly questioning the investment practices of the past and re-evaluating the concept of meaningful contribution,” says Bray.

Given the continued uncertainty, he explains that people are becoming more aware of the critical importance of growing their retirement savings, leaving a legacy, and making a meaningful impact on surrounding communities.

3. Try to settle your bond sooner

Carl Coetzee, CEO of BetterBond, says that it’s always a good idea to pay more into your bond if you have the financial means to do so.

“Interest rates have been at a record-low for more than a year now, but they will gradually start to normalise. Regardless of the prime lending rate, paying more into your bond will not only save on interest over the long term, it will also shave a few years off your repayment period,” says Coetzee.

As an example, he notes that by paying just R1,000 extra each month into a 20-year bond for a R1 million home, at the current prime lending rate of 7.25%, it’s possible to save about R219,000 in interest and reduce the loan repayment period by four years.

If you’re struggling with your overall repayments, consider debt consolidation.