I previously wrote about the danger of financial assumptions. There was one financial assumption that I didn’t touch upon in that blog post and that is the assumption that if we bury our heads in the sand long enough and just keep going our finances will take care of themselves. Unfortunately that simply isn’t the case and so, before we get onto the more exciting topics of how to make and save money, I think it’s worth having a bit of a chat about how to determine where you’re at financially at this present moment.
First up, let me say, I am no authority on this topic. The advice (if you can even call it that) I give is purely from my own experience. If you feel you need financial advice, please seek out a professional to help you and if you’re in lots of debt, please seek help – the Citizens Advice Bureau (CAB) is a good place to start. Likewise, if you’re looking to calculate your Net Worth, you’re also reading the wrong chick.
Determining your current financial situation
So, how are you doing? Loads of money left over in your bank account at the end of each month? Struggling to make ends meet? Covering the essentials with little left for treats? The truth is, I don’t think many of us are as intimate with our bank balances as we should be.
How can we address this? Easy. Make yourself a cuppa and sit down, either with a pen, a piece of paper and a trusty calculator, or use Google Sheets or Microsoft Excel on your computer. The first thing you’re going to do is look at your debt. For the purpose of this exercise we will forget about debt where you pay a set amount (or thereabouts) each month, so don’t include things like mortgages and HP loan payments – we’ll get to those in a bit. Do, however, include credit card balances (even if you pay them off each month) and overdraft amounts.
Got that? OK?
Now take a look at your essential expenditure. By ‘essential’ I mean the things you absolutely have to pay, things like gas and electricity; your mortgage or rent and your Council Tax. Write down how often these bills are due and how much you pay on each due date. So for us this would be something along the lines of:
- Mortgage – monthly
- Ground Rent – December
- Service Charge – June & December
- Life Assurance – Monthly
- Electricity and Gas – Quarterly (difficult to determine the months sometimes as we keep switching suppliers to get a better deal)
- Water (January & July)
- Council Tax (Monthly, except February and March)
- Home Contents Insurance (January) – NB we don’t need Buildings Insurance as that’s covered in our Service Charge payment
- Nursery fees (monthly)
They are all the things that there’s absolutely no way we could do without and the amounts are fairly set in stone, in that there’s not a fat lot we can do to make them cheaper, given that we’ve already negotiated decent deals.
Next up take a look at the amount in your current account, or the account you pay your bills from (you may want to complete this exercise with your partner and include their incomings and outgoings too to give you a true picture of your financial situation. Do you have enough to cover the bills for the next month, including paying off enough of the debt? If yes, great! If not, you need to stop and take check. Is it just because you’re so close to pay day and once you get paid you will be able to cover the expenditure. If so, great. If not, you either need to seek help (especially if your debt levels are escalating outside of your control) or find a way to make more money.
If there’s enough in the bank to cover that essential expenditure, now start adding in the semi-essentials. I include food and petrol within this, only because if money is tight you can cut back in these areas by shopping more frugally and walking more! I also include things that we could stop using/sell if we really needed to. So for us this list looks like this…
- Phone/Broadband (Monthly)
- TV Licence (September)
- Washing Machine product Insurance (Monthly)
- HP on car (Monthly)
- Groceries (Monthly)
- Petrol (Monthly)
Repeat the exercise with the money you have in your current account (or the money you’re due on pay day). Got enough? Great! Move onto the next step. Struggling? Find ways you can cut back.
Next up is the turn of the ‘nice things’. A lot of these feel like essentials, but in reality if money is tight these are the contracts you can cancel to balance the books. So for me this is:
- Contact Lenses (Monthly)
- Spotify (Monthly)
- Mobile phones (Monthly)
- TV subscription (Monthly)
Repeat the exercise to see if you have enough set aside for this expenditure and readjust as you need to.
Budgeting your finances
After that, it’s the turn of budgeting. Different people will do this in different ways. For us at the moment it’s a case of making sure we have enough money for the bills that are due to go out the following month. However, now I’ve taken on more hours at work and can enjoy the extra salary that that brings we will probably switch back to setting aside a set amount for each bill every month, making sure we have enough in the bills kitty for the time the bill payment is due.
Whatever I have left over after I’ve budgeted for the bills gets split between my savings and my ‘kitty’ (a.k.a my spending money) for that month. Of course, if you’re in debt it’s always worth putting extra money towards paying off debt first, as interest rates are usually higher on debts (with exception of some student loans) than any amount you will earn on savings (especially with the paltry rates being offered by financial institutions these days).
With our finances it’s all too easy to rush ahead and think that making extra money is the answer to our money woes, but if you haven’t got a grip on your finances to begin with then it’s like starting Slimming World with a target weight but not knowing what your current weight is. You just wouldn’t do it and neither should you leave your finances to chance either.
How do you manage your finances?