Dubai: If the thought of scanning bank statements and confronting credit card debt is as dreadful as the idea of sorting through mountains of clutter in your home, the start of the upcoming new year would be a good time to untangle the complex state of your finances.
“Creating a budget is the financial equivalent of decluttering,” said Mirin Raul, a Dubai-based personal finance counsellor who coaches people on issues with tracking uncontrolled expenses and liabilities.
“When you finally take the time to create a spending plan, you’ll enjoy the same feeling of empowerment that comes with tidying up a disorganised space. With an organised budget and spending plan in place, you will stop feeling that you’ve been at a disadvantage all this while.”
Creating a budget is the financial equivalent of decluttering
Step #1: Tabulate how much income, expenses changed for you in 2022
Reexamining your budget ahead of a new year can help you figure out where you’ll need to adjust. Say your income has changed since the last time you checked in on your budget, or you’ve taken on new debt or paid off a loan.
Taking stock of how much you’re spending and how you expect that to change in the new year can help you stay on track to reach your goals and make sure that you’re setting enough aside to cover your expenses and hit your goals in a timely manner.
“The new year is also a good time to consider how you’ll replenish your savings or pay down any debt you’ve taken on in the past year,” said Andrea Barber, an Abu Dhabi-based financial planner, who has been residing in the GCC for two-plus decades.
“If your financial situation is still a work in progress, use this time before the new year starts to figure out how to course-correct. Small tweaks to your budget, savings contributions, debt repayment strategy, and spending habits can all add up to major progress toward your money goals over time.”
Step #2: List out assets, liabilities; categorise debt according to interest rate
When reviewing assets and liabilities, gather statements from your bank accounts and retirement or investment portfolios and list valuables that you own, such as a vehicle or house property, etc. Also, gather statements for liabilities like personal loans, car loans, housing loans or outstanding credit cards.
Paying off your loans, especially those that charge a higher interest rate, can help enhance your credit score. You can start by clearing outstanding credit card dues, car loans, or even personal loans, if any, and then move on to other debts like home loans.
“After having listed out your debt obligations; it will help you prioritise which loans to pay off as early as possible. This is the ideal time to set goals for reducing your debt burden in the coming year. You may consider debt restructuring or debt consolidation plans to manage your debt burden,” added Raul.
“This will help maintain your debt-to-income ratio below 40 per cent, which will get you access to avail loans in future in times of need. By reducing debt, you would be able to save more and invest it wisely in rewarding investment avenues that help in wealth creation.”
While many life and health insurance options are affordable, now is the time to check whether you have easy access to your current claims
Step #3: Check to see if insurance, investments match your current income
When thinking about personal or your family’s finances, most often the priority is to prepare for emergencies. Life insurance and health insurance should be part of your financial plan, especially if your family depends on your income to cover monthly expenses.
“While many life and health insurance options are affordable and offer you plans that cover you and your entire family, now is the time to check whether you have easy access to your current claims in the event of an emergency, while ensuring feasibility as per your year-end income review,” added Barber.
“In case you have existing life and health insurance coverage, you may consider evaluating the same and ensuring it covers all your medical and financial requirements as well, apart from checking financial viability from a personal standpoint.”
If you are planning to complete several tasks before the new year, reviewing your investment portfolio should also be one of them. With all the changes that you and your investment portfolio might have experienced over the prevailing year, it's vital to take some time to evaluate your holdings this year.
“An annual review of your investments will help re-align your investment strategy with your financial goals. By planning a year-end portfolio review of your investments, you can also eliminate the consistently underperforming schemes that drag down the overall portfolio returns,” added Raul.
Both Raul and Barber agree that the earlier you assess your financial situation, the sooner you will be able to may make changes without stressing later. The most important decision you can make as the year ends is ensuring everything is in order with your finances.
“With a few days left in 2022, if you’re a saver, borrower, or investor, make most of the time to look back and make changes to your financial, investment and retirement goals. This strategic checkpoint ensures you stay on your path towards financial success in the coming year,” added Barber.
“Cut spending and invest the difference, even if it’s just a few dirhams each month. Watching savings grow is a nice hobby. Also, set aside money for small luxuries every month, a well-earned splurge is a sure remedy to reckless spending. I personally feel the no-spend challenge helps gain perspective on how much money goes to your wants.”
Therefore, you need to consider the above-mentioned key points in your financial checklist while approaching the year 2023. Additionally, you need to enhance your financial knowledge to better understand the nuances of financial planning and work towards building a secure financial future.