Many aspects of our lives revolve around money and yet probably you have never been taught how to manage your money. As the world has progressed there are many more things that we can spend money on. Businesses are constantly trying to get you to buy the latest and best products. Inflation can be a problem as we see prices rises and incomes failing to keep up with the increased costs. On top of that, life can throw us a curve ball and our income can be changed, perhaps a loss of job, reduced hours at work or illness. How we manage our money can be key to our sanity!
You will have heard people telling you that you must use a budget planner and that is good advice. Sadly though on their own budgets don’t work! I hope that I have not shattered your hopes but there is much more to managing your money than a budget. I will deal with budgets because they are important but first there is the problem of our mindset. This means controlling our wants and not viewing them as needs. We need food but we don’t need caviar and champagne. A car might be essential but does it have to be new or a Ferrari? The cost difference between a need and a want can be vast.
Other wants could not be mistaken as a need at all such as owning jewellery, having a tattoo, collecting art and attending sporting events to name but a few. The marketing genius’ continue to tell us what we must have and it works. They are creating needs that are in most cases nothing more than vanity. Even worse, they market the credit cards and bank loans to lend you the money to satisfy their created desires! The result of their myth is that sadly many people get heavily into debt. Those who want and can’t have can live in misery thinking that they are missing out and a some turn to crime to try to satisfy this desire. There is also a generation of young people who judge themselves and others on what material possessions they have, rather than who they are as people.
Now let me say that there is nothing wrong with buying some of these ‘wants’, but you have to be able to afford them and treat them as luxuries to be earned after all other real needs have been met. It is also important that potential situations in the future are taken into account. More about that later in this post.
Carry Out an Accurate Audit
The first thing we all need to do to in order to manage our money is to understand accurately our true costs. We need to look at every penny we spend and where it all goes. This means absolutely no cheating or trying to convince ourselves that we don’t really spend as much as we do on certain things, perhaps alcohol or cigarettes as an example. (Giving up vices that are likely to damage our health is a win win scenario.)
Many today pay their bills by direct debit and for daily shopping use a debit or credit card rather than cash, so looking back over statements can reveal many of the places where our money goes. At this stage, it’s best simply to record everything that is spent and write it down or use a spreadsheet. Here is a link to a spreadsheet for you to download. It is in Excel but can be imported into Google Drive and other systems. There are many free templates online should you wish to find an alternative. Plus you could try this online budget planner from the UK Money Advice Centre.
There are of course some items that are paid for annually or even replaced over many years such as sofas and other furniture items, major electrical appliances, and necessary home maintenance. It would be good to look at the last 3 months so see where your regular spending is but then look at all those things that are not going to appear on any statements plus those that have not been in the time period that you are looking at.
Once you have analysed your outgoings you then need to check the income you receive, for most people, this will be straightforward with only one or two incomes to record. Others might have such things as pensions, state benefits and investment income. Of course, at this stage, we now hope that your income is larger than your outgoings. If this is the case, that’s wonderful but more work needs to be done to make sure that you are making the best use of your money.
Separate Needs from Wants
Your next task is to look for money being spent that is not essential and separate this from the essential. We will look at these items later.
Now it’s time to look at the essentials. These will be things like food, utilities, insurance, clothing, commuting costs, and mortgage/rent. We live in a competitive world and in many countries, certainly here in the UK, there are a plethora of deals even on services such as gas and electricity. With a little shopping around on these, you can save substantial amounts of money. For many people, a mortgage is a huge commitment and by shopping around you could find a lower interest rate but do take into account any costs involved which could wipe out the savings in interest.
With food shopping, learn to shop around and look for goods that might not be branded but are equally as good, if not better, than some branded products at much less cost. Look for special offers and be careful where supermarkets sell the larger sizes for more than the combined price of smaller packets. It’s far more common than you think because we have been programmed to think that buying larger quantities means lower cost. Work the price per kilogram or millilitre.
You can also look to see if you can reduce the amount you consume, such as turning the thermostat down a degree or two, turning off unused lights, reduce heat in unused homes, saving water and food wastage. There is lots of good advice on how to do all of this without making yourself miserable.
Negotiate a Good Deal
It’s surprising too, that many companies that you already deal with and have been loyal to, will offer you a better deal if you say that you’re going to leave. I have done this on my mobile phone contract and get a better deal each year with the same provider. This year I substantially reduced the cost of my car insurance with my insurer after talking to them. Don’t be frightened to pick up the phone, but before you do, research what other companies are offering, comparing like for like. Always remember that it’s possible to make things cheaper because they offer less. Be very careful especially with complicated products like car insurance where you need to take many things into account.
How is your budget looking at this point? Is your income well above your outgoings? Or, are the outgoings greater than your income? At this point look at the list of non-essentials that you wrote down earlier. I hope you included things like TV and music channel subscriptions but don’t panic yet it might be possible to keep these if you can afford them. You might also get them cheaper when you threaten to leave, that is if you do decide to keep them. Eating out, takeaway meals, gym memberships, magazine subscriptions, newspapers, coffee on the go, weekend short vacation breaks, and much more should be on your list. Do not let your heart rule your head, the ad men have been conditioning us for years to turn wants into needs, so be strong and realistic. Work out how much each of the items on the list is costing you on average each month.
Here is a little exercise to help you put into perspective the true cost of something. Let’s say that your income after tax is £400 per week and you work 5 days a week to earn that. Now let’s take a small cost item, say a coffee at £2.50 and you purchase one a day on your way into work. It’s a small treat to help you get the day off to a good start, sounds reasonable and affordable, right? Well, let’s do some math. If you have 5 weeks away from work that means over the course of a year you would buy 5 coffees for 47 weeks at £2.50 each which amounts to a staggering £587.50. It also means that you have to work for 7.34 days to pay for those coffees. Imagine if could take that as unpaid leave or spend it for something better than a cup of coffee! Always remember that small amounts add up. Working out how long you have to work to pay for something really does focus the mind on the true cost of things.
Dealing with Debt
Far too many people are in debt. A loan can be useful to buy something absolutely essential if the cash is not available, but ideally, and this is where a change in mindset is so powerful, you should be able to plan ahead and save for future purchases. Most debt tends to be created where people are buying non-essential items or possibly essential ones but trading up to higher value purchases. A large number of people are persuaded to purchase a new motor car when they have visited a dealer for a pre-owned model. The finance deals can be so tempting and often appear to be of better value than they actually are, especially when a clever salesperson is promoting them.
Back to the debts and credit cards that you have. Write down a list of each debt and include your bank overdraft if you are overdrawn. Add the monthly payment and for credit cards the current minimum monthly payment. Also, write down the amount outstanding on each and the interest rate. Make a promise not to add anything else to the credit card unless you genuinely do not have the cash to pay for it and it is an essential item. Credit cards are useful, especially for online transactions and give you some consumer protection so I am not against them, but learn not to buy things that you don’t need or can’t afford to pay cash for. Spending cash makes you think much harder before purchasing and that’s why credit cards are so dangerous, for many people that correlation between plastic and real money vanishes. When interest is added an item costs far more than its original ticket price.
Looking at your budget you need to work out what you need to save towards future expenses and what is left we need to tackle debt before anything else. Generally speaking, it is now best to allocate the most that you can repay each month to the debt with the highest interest. If you don’t have enough to meet the monthly payments, having eliminated all non-essential items and reduced your outgoings you will need to take steps, either to increase your income, ask a family member or friend for help, or liaise with your debtors to see if you can reduce the payments and lengthen the loan periods, this is unlikely with credit cards. If you do this your credit score can be adversely affected. Work out how long it will take you to pay off each debt and as each one is paid off this will free up funds to help reduce the others faster as well as maybe give you a little more money to use in your budget for future items.
A recommended goal is for everyone to have between 3 to 6 months of their income kept by as an emergency fund. Wherever possible do not skimp on insurance, not only in case you die and have a family to support but if you are sick and unable to work.
Savings can be split into 3 areas. Short term, mid term and long term savings. Investment companies might choose different lengths of time to these periods but for our purposes, I believe the years work out well.
Short term savings are mainly for 1 to 2 years and will cover those things that you have to pay once a year, Christmas, Birthdays, holidays, insurance, taxes and so on. On the matter of presents don’t let the marketing genius’s ruin your life. The size or value of a gift does not equal love – period. There are many that have opted out of the costs associated with Christmas and other celebrations which could almost be described as ‘forced spending’ events.
Mid term savings 3 to 7 years could be for household expenses such as replacing a sofa or car, major repairs or something special to save for.
Long term savings are really for those things that you will need to put away money for a long time, so a new parent may wish to start saving for university fees, a deposit on a home or a wedding. Pensions are probably the most obvious long term savings plan.
One top tip for savers is to have a number of savings accounts so that you are not tempted to take money allocated for another purpose. Keep in mind that you make sure you get the best interest saving rate that you can and be prepared to move from one institution to another from time to time. Review your interest rates regularly and at worst, once a year. If the money is in one account keep a record of how much is allocated to each saving fund and do not borrow from ‘Peter to pay Paul’ as tempting as it might be.
Learning how to manage your money is one of the most important things that you can do and by developing the right attitude towards money and how you spend it is the best way forward. There is a huge movement that is gathering pace as more people realise that things don’t bring happiness, so don’t be conned into buying what the advertisers are urging you to buy using all kinds of phycological tactics. Set aside time to budget properly and review every month what you spend, once you get used to it and set up your finances it will not take long. I wish you every success in getting free of worry by learning how to manage your money.