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The end of the year is a time of reflection for many, and while some will reflect on their experiences and achievements, financial experts say it's just as important to take stock of your finances.
Keeping your expenses under control may have seemed like an uphill battle this year, as wages often failed to keep up with the rising cost of living. In the USA Bankrate's Wage to inflation ratio in 2024 found that between January 2021 and June 2024, prices increased by 20%, but wages only increased by 17.4% over the same period.
As a result, according to a recent study, almost half of Americans say they live paycheck to paycheck Bank of America Survey.
“The end of the year can be a great time to reflect on your finances, but it's important not to be hard on yourself,” Tamara Harel-Cohen, co-founder of financial well-being app RiseUp, told CNBC Make It.
Harel-Cohen advised against checking every penny you spend because you can't always achieve your financial goals.
Meanwhile, Sarah Coles, director of personal finance at Hargreaves Lansdown, said there is always room for improvement when it comes to managing your money.
“It seems like if you make it to the end of the year in one piece financially, you'll probably be fine. However, this approach puts you at risk of neglecting key aspects of your finances,” Coles said.
CNBC Make It asked four financial experts for their top tips for reflection and money management as the end of the year approaches.
“Have compassion for yourself.”
A “common phenomenon” in December is that people feel ashamed of how they have handled their money, Vicky Reynal, a financial psychotherapist and author of the book “Money on Your Mind,” told CNBC Make It.
“One thing I would say is self-compassion,” Reynal said. “There is almost a sense that everyone thinks they should be better than they are.”
This can keep us from thinking productively about how to turn things around, Reynal said. The truth is that financial management is “not an innate skill” and is often not taught by schools or parents.
“So we pick it up as we go and inevitably we make mistakes. But what we can do is, instead of stewing in guilt and shame, we can take it and reframe it in terms of: What can I do differently? What do I want to do differently financially next year?” Reynal added.
“5 cornerstones of healthy finances”
Hargreaves Lansdown's Coles suggested an audit of five key financial areas.
“We should especially take stock of the five pillars of healthy finances: Are your short-term debts under control? Do you have adequate resources to protect your family – including life insurance and a will? Do you have enough emergency savings to cover three to six months of necessary expenses? Are you on track to saving for retirement? Are you investing to make more money wherever you can?” she said.
Understanding your financial situation within these five key areas can help you lay the foundations for your budget and new financial goals, Coles added.
Don't complicate budgeting
According to Reynal, many New Year's money resolutions fail because they are usually overly complicated.
“Sometimes people proudly come to me and say, 'I created this spreadsheet, it has 30 tabs. I'm going to record all my expenses. But it's not sustainable,” Reynal said. “I always encourage people to keep it simple and find the right tools.”
She suggested using budgeting apps and investing platforms to take the workload off your mind.
“This will simplify and enable a cycle where you feel empowered. You have small victories and that's how you perpetuate a virtual circle where you start to build the confidence that, 'Look, I managed to do it this month, so maybe I can do it next month,'” she added.
Harel-Cohen agreed, saying that even having a “five-minute conversation” with yourself in the morning about how you're going to spend your money throughout the day will help you make better decisions without feeling overwhelmed.
“Remember that improving your financial health is a marathon, not a sprint,” Harel-Cohen added.
Small, lasting improvements
According to Reynal, the second reason many financial resolutions fail is that they are too ambitious.
“There is a lot to be said about small victories in terms of building self-confidence, building a sense of agency and creating momentum,” she said, adding that setting “small, achievable goals” is the path to success.
Harel-Cohen advised automating monthly payments to a savings account to achieve long-term goals such as vacations or retirement.
She said, “Once you figure it out, just sit back and forget about it.”
Consider your feelings
According to Ylva Baeckström, senior lecturer in finance at King's Business School, it's okay to indulge yourself every now and then.
Spending money shouldn't always cause anxiety, she said. “How much have you actually spent on things you don't really need? And how did you feel spending that money? Did it make you anxious or stressed, or did it make you feel better?” – Baeckström said.
“If this has made you feel anxious, you need to change your habit. However, if it made you feel better, it may be worth continuing to indulge in this particular luxury. Treat yourself to treats that make you feel good and cut down on expenses that make you anxious,” she added.