By Neli Mbara, Certified Financial Planner at Alexander Forbes
Budgeting is the most important thing you can do to manage your money – you need to treat budgeting as a form of self-care. For many people the end of the year and the start of a new one is a time to reflect on their spending and income over the year. Even though this may have been a year where some financial goals were not met as it was a financially straining year for most, it is still a good idea to review your current financial position and consider investing your time in budgeting for the future, if you haven’t done so already.
What is a budget and what’s the point of having one?
A budget is simply where you identify your income and expenses and decide if you need to pay off some debt or can afford to save and how much.
The point of having a budget is to take control of your finances, to avoid being ‘caught out’ by an unexpected bill or finding that you cannot afford to do some of the things that you want to do. If you have debt, having a budget to help pay them off, puts you in control, manages your credit score and gives you a better understanding of your disposal income after all expenses.
How much detail do I need?
You need to find out what works for you. Some people simply have an idea in their head of what they can afford to do each month. Other people like to itemise everything on a spreadsheet and go through it regularly. What matters is that you take note of what you earn and what you spend and monitor it so that you know whether you are on track or need to amend your budgeting and spend.
Earning and spending
You probably have a clear understanding of the amount you earn, whether by working, or rent from a property, or income on your investments. What may be a little fuzzy is the amount you spend. During lockdown there has been increased spending online and it’s so easy to press the ‘buy now’ button, especially if things are not going well. Ideally you need to consider what you generally spend in an average month, and plan for expenditure that happens less regularly but is still part of your essential living costs such as a car service.
If you can’t remember, look back over the past 12 months – or the last 2 or 3 months of bank statements – to see where your money is going each month. Are you paying for subscriptions you don’t need any more? Companies nowadays won’t contact you with a better deal; unfortunately, you have to ‘shop around’. However, you could make significant savings on your insurance, mobile phone contract, streaming services or club memberships.
You can budget to pay off a small amount of your debts at first and as you see the amount falling, you may be able to pay more until finally it is paid off.
Sometimes people find it difficult to work out whether you should pay off more debt or save for your future, as well as which debt to pay off first. This is again where you need to get advice to help you plan your approach because everyone is different and has their own expectations.
When you have worked out your income and average spending, you can see if your income is generally more than your expenses. If it is, then make sure you set aside some money in an emergency fund in the event of unexpected expenses. This varies depending on your situation, but it is generally advised to save three to six months of income. This helps avoid a crisis if you receive an unexpected bill or expense in the short term or if you suddenly lose your job and need to cover your essential expenditure while looking for another job.
Save for your future
Once your emergency fund is taken care of, you can decide how much to save for the longer term. Setting money aside now for you to spend later is sound financial planning. The power of compounding (where the interest you earn on the money you have itself earns interest) will propel your savings even higher once you get going.
You may have a specific goal you are saving for such as a holiday (remember those?) or university expenses, or it may be putting a monthly amount away for your retirement. If you’re already retired, you might be thinking about your living or medical expenses, and the costs of a care home. Saving early will have a significant impact on the amount you have later, so even putting a small amount aside each month will build up into a tidy sum if left alone to grow.
This is where you should seek advice from a certified financial adviser to ensure that you plan and save in the right product with the right level of risk that will help you meet your saving objectives.
A sustainable habit
Carrying out a review of your finances is the first step. Sometimes the harder part is keeping up a good habit. There are hundreds of articles online with great tips and hints and a range of apps available that will help with budgeting. Some help you to create a spreadsheet, some bank apps will round up your spending so that rands go into a savings account automatically, and others will track your spending and show you where your money is going. Anything you can do to save will help build up your funds over time.
2021 FINANCE SPEND PREDICTIONS
by Andrew Foster, VP Consulting EMEA, AppZen
As we enter a new year filled with ongoing change and uncertainty, a few things are still clear. Though digital transformation has long been a familiar story told across the finance sector, businesses are recognising the need to adopt new technologies as a matter of urgency. As a result, 2021 will see a huge shift towards embracing technologies that transform finance procedures.
Anant Kale, Co-Founder and CEO, AppZen, shares his finance predictions for 2021:
The year of accelerated digital transformation
The current pandemic forced companies of all sizes, across nearly every industry, to virtualise their workforce, almost overnight. But in the coming year, finance leaders will be turning their attention to wider digitalisation efforts.
Kale explains, “Last year, the focus was on how to quickly keep up with changing business needs, with CIOs focusing on business continuity in a remote work environment—conferencing and collaboration tools, network upgrades, and so on. As we finally caught our breath, this next year will bring even deeper transformation. Rethinking and reimagining business processes in an AI-first world will keep enterprises agile, efficient, compliant and allow them to scale without relying on adding huge headcounts, which will be critical to the bottom line.”
Consequently, more CFOs will be driving the push for AI-powered programmes to be implemented into finance operations to accelerate digital transformation, streamlining operations across the entire enterprise and ensuring business resilience.
Expanding digital transformation – beyond the basics
Over the past year, the drive to enable remote working across the whole organisation has meant the deployment of a wide variety of technologies. Yet, most of these solutions are not in areas that directly increase the finance department’s efficiency. This year, finance leaders will be prioritising two specific functions that are prime for disruption and enhancement – AI-based invoice processing and expense auditing.
“Increasingly, AP invoice processing decisions will be made in the autonomous zone, where intelligent systems can independently make decisions that don’t require human second guessing or manual review,” said Kale. “With autonomous AP, systems that are capable of evaluating all aspects of invoice entry, matching, accounting approvals and even risk and compliance, AP teams will be able to move from operations to more strategic AP concerns.”
AppZen’s recent survey of top CFOs and finance executives confirms the need for deeper transformation in 2021. Currently, 59 per cent respondents report they still haven’t automated ingestion and extraction of data from invoices. Unsurprisingly then, a notable 43.5 per cent of organisations still take seven or more days on average to process an invoice. Organisations with more proficient automated processes only take 2.9 days to process an invoice on average — a considerable difference that supports the need for increased automation and AI uptake among modern finance teams.
Adapting for expenses in the 2021 work-world
CFOs will need to budget for different types of business expenses in light of the new environment. With an evolving workforce that includes remote, on-site and hybrid workers, they need to rethink their strategies and plan scenarios in ways they’ve never had to do before.
To this point, Kale comments, “Business travel will come back in some form later this year, but more importantly, the nature of expenses that have traditionally been associated with travel and entertainment (T&E) will change. Instituting routine audits and implementing clear expense policies will be critical to avoid fraud and abuse or unreliable financial data, which cost businesses nearly $3B dollars a year—and that was before the pandemic.”
As the spend environment becomes more complex, spend visibility is more vital now than ever. Finance leaders need to have the right tools in place to identify these new types of expenses – such as the number of video conferencing licences acquired, home office equipment, and productivity software – and properly assess spend priorities.
Flexibility is also crucial. In a rapidly-evolving environment, a one-size-fits-all policy isn’t up to standard. “How enterprises create and allocate budgets has been completely disrupted and what worked in the past won’t work in 2021,” declares Kale. “We’ve gone from a relatively certain, predictable way of carrying out business operations to a time where only the unpredictable seems certain, which requires agility, speed, and scale to ensure longevity and continuity.”
Despite challenging times, finance leaders are showing optimism for 2021. This year will require adaptability in the face of evolving global economic conditions in order to meet not only wider company needs, but those of employees as well. Embracing new technologies will continue to transform operations across every level of an organisation and enable business leaders to drive both productivity and profitability despite the uncertainty ahead.
THE LOYALTY-TRUST PARADOX AT THE HEART OF FINANCIAL SERVICES AND HOW TO OVERCOME IT
By Andrew Warren, Head of Banking & Financial Services, UK&I at Cognizant
There has long been a paradox at the heart of the financial sector – customer loyalty remains high despite overall trust in the banking system being very low. In any other sector, low trust would lead customers looking for services elsewhere. Generally, however, the major banks have been able to retain their clients despite, rather than because of, trust.
This customer loyalty does not always pay, with research suggesting consumers could be overpaying by £2.9bn in areas such as mobile, broadband, home insurance, as well as, notably, mortgages and savings. Whether the result of customer lethargy, lack of awareness of the possible cost savings or low expectations of the service banks provide, this has encouraged complacency in the banking sector.
This could, however, change as our post-pandemic reality begins to bite. People may have used the extra time from the lack of a commute to do some research and shop around for better alternatives, as well as harbouring frustrations over a perceived lack of support in recent months. Coupled with the possibility of a period of negative interest rates, we could soon be heading towards a perfect storm, where both retail giants and small local businesses start to question the value their banks actually provide.
Digital native challengers are shifting the landscape
One viable reason for the supposed loyalty consumers have towards the major banks has been the lack of real alternatives. With all of the traditional high street institutions offering services that were largely interchangeable, switching services seemed more effort than was really worth it when perceived benefits were so minimal. However, this changed with the arrival in recent years of challenger banks such as Monzo, Starling and Revolut, which continue to grow in popularity due to ease of use and better customer experience from sign-up through to their intuitive apps.
The primary advantage of the big banks is their liquidity, historical reputations and longstanding customer base. However, the agility and user-friendliness of the challengers is shifting the landscape, and the continued reliance on legacy systems leaves the traditional players struggling to surpass, or in most cases match, the innovative services and products fintechs are able to bring to the market.
Customer expectations setting a new standard
As personalisation and smooth technological integration in other sectors, such as retail, raises expectations of similar offerings across all service industries, this could soon become a key battleground for banks.
With the challengers currently looking better equipped to respond to these consumer needs, here are some of the steps banks can take to modernise their offerings and retain customers’ loyalty:
- Embracing human science – the financial sector has long favoured data science in its behavioural analysis. Almost anyone can understand basic data; it is how semiotic algorithms can be used alongside this that will reveal real insights that can be used simply to help understand people better, their fears, their hopes and their aspirations.
- Adapting to modern trends – the lockdown has, by necessity, modified and in some cases accelerated, many of the established habits of both individuals and businesses. These range from an increased adoption of cashless payments, to remote working, the propensity for saving vs investing, attitudes towards fraud and risk appetite, and loyalty. As a result, some customer journeys, which had become the cornerstone of banks’ or lenders’ strategies, will now need to be adapted. For example, products, pricing and customer treatment strategies will need to be updated, and the entire value-chain of customer touchpoints should be digitally enabled. Financial institutions will now need to ensure speed and quality of their response to this change.
- Using innovation to level the playing field – the systemic advantage the big banks have over more agile challengers is in liquidity access. It is an advantage that potentially will be scrutinised in the COVID-19 enquiries we can expect to see in the near future, particularly around the provision of the various governmental support schemes and loans for which these big banks initially had responsibility. As that advantage then reduces, the need for real innovation grows. This means building business models and deploying technology that can deliver value and differentiation. For example, the major banks have more channels than their digital-only counterparts and, therefore, more data to draw on. The result is a better focus on customer journeys, with modern cloud-based data management platforms central to this. The quantity and detail of data can play in banks’ favour, allowing constant ongoing improvements to customer communications and simplifying self-service options in an increasingly remote world. It is important that banks continue to ensure they are thinking outside the box and keeping pace with other industries that are innovating in their response to the pandemic.
- Personalising the process – technology is already helping to speed up processes and improve self-service banking operations, particularly with predictive and smart decision-making through AI and ML. The advanced use of chatbots is an example, along with increasing tailored content and interfaces in apps and on digital platforms. However, the end goal is personalisation across the whole customer journey, not only through technology but also call centre operatives who still form a critical role in trouble shooting and need an up to date view of the customer in order to be able to do their job. Technology can also help analyse how these human interactions can then become more personalised.
The major banks retain a crucial position in UK society for the support and confidence they offer their customers. However, as in so many other sectors, the coronavirus pandemic could come to be seen as a watershed moment in their evolution. With the challengers continuing to gain momentum, banks certainly cannot afford to stand still. It is the ability to have a data- and technology-driven approach, as outlined here, that can help them retain their dominance and justify customer loyalty now lockdown is beginning to lift. Should they fail to do so, we may find ourselves in a very different landscape than we do today. By focusing on the steps above, banks will start to level out the playing field.
2021 FINANCE SPEND PREDICTIONS
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