Seven simple steps to help you stay out of money trouble

THE festive hangover may be long gone, but for many people, the year ahead threatens plenty of financial headaches. Whether you're battling with rising debts or struggling to generate savings, there are two instinctive but contrasting responses – bury your head in the sand or tackle the problem.

There's no better time than the early days of the new year to make a fresh start with your finances, whether it's paying off debts, clearing a mortgage, building savings or getting on the property ladder.

1 REVIEW YOUR FINANCIAL POSITION Only by knowing where you stand can you move forward. This means knowing the extent of your outgoings – including bills, insurance and rent or mortgage payments – and what you have coming in. By setting out your income and expenditure, you can identify areas in which costs can be cut.

Derek Smith, a director at Melville Hutchison Financial Management in Edinburgh, suggested setting aside an hour or two to work through the basics of your finances.

"Start with your monthly budget, perhaps easiest done by scrutinising your bank statement in order to identify where most of your money is spent," he says. "You are bound to identify savings that can be made – be brutal!"

The Financial Services Authority's Money Made Clear website – www.moneymade clear.fsa.gov.uk – features a calculator that can help give you a better idea of where you stand.

2 MAKE A BUDGET Once you know what's coming in and going out, you can build a budget to govern your daily, weekly and monthly spending. The hardest part of successful budgeting is being disciplined – set it and stick to it, says Smith. "Be hard on yourself and set a stretching target – eg, a 30 per cent reduction in expenditure."

3 CUT YOUR COSTS Your review will have highlighted the expenses that are eating into your weekly and monthly spend. Now think about which ones can be reduced or cut altogether. For instance, cancel any direct debits you can no longer justify, such as a dormant gym membership, and shop around for cheaper alternatives to your current mobile phone or home communications package. There's a strong chance you could reduce household expenditure by shopping around for a new energy deal – if you are on your supplier's standard tariff and paying by quarterly bill, you could save up to 300 a year by switching to an online tariff and paying by direct debit.

You may also be paying more for insurance – including home and contents, car or life insurance – than necessary. Shop around to see if you can get a better deal than you currently have and make any changes that could reduce your premiums. Re-broke your life insurance if you have quit smoking, for example, or improve your car security to cut your motor insurance premiums.

4 PRIORITISE YOUR DEBT REPAYMENTS If you have managed to cut costs, you could consider increasing the payments on your most expensive debts – usually credit cards – to get them cleared first. If not, one option may be to consolidate your debts into a large loan, although this is not as easy as it used to be, with affordable credit in short supply. If you're on a low tracker or variable rate mortgage and have your debts under control, this is a good time to save money in the long term by overpaying your mortgage. Just by keeping your repayments at their previous level, you could take years off your mortgage term.

5 CLAIM YOUR ENTITLEMENTS Ensure you claim any government benefits you may be entitled to, from pension credit and child benefit to tax relief. Pensioners failed to claim some 2.4 billion in pension credit last year, according to financial advice website unbiased.co.uk, which also estimated that 8 per cent of families do not get child tax credit to which they are entitled. For more information on benefits, contact your local council or your local Citizens Advice bureau. Also, visit www.entitled.com to check you are getting everything you are eligible for.

6REVIEW YOUR PENSION Sift through your pension investments to unearth any underperformance or expensive plans. If you have several long-standing pensions, perhaps from previous employers, it is particularly worth checking the charges, as the costs of certain pension plans can decimate the eventual returns.

Ask your pension provider/s for a statement showing the current value of your plan, a transfer value (showing the impact of exit penalties) and the projected value at retirement. Only then can you work out whether it is worth transferring. But financial advice is essential, particularly for pension transfers.

7 PUT SOME MONEY ASIDE If you're reduced your debts and cut costs, it's time to consider putting some money aside.

There may be specific costs to save for, such as work on the house or a wedding, or you may just want to build your rainy-day and retirement savings. Smith says: "Once these types of goals are identified, you can start building a financial plan to help you achieve your goals.

"This can be a very rewarding experience, helping you feel much more in control of your life.

"It may also lead you to significant career and lifestyle decisions."

Savings interest rates may be low at present, but you can start by taking advantage of your annual individual savings account (Isa) allowance – currently 10,200 (5,100 in cash) for over-50s and rising to that level from 7,200 in April for under-50s – your savings will grow unimpeded by income tax.