We’re getting into our finances this month. This instalment leans more towards personal finances; however the principles also apply with business accounting too. I wanted to write this series on money because it’s one of those areas where many businesses struggle. It’s simply because we won’t talk about it. We are too embarrassed or feel it might be used to judge us. After all, the quote goes ‘numbers don’t lie’. In a recent survey more people in Britain said they are more comfortable talking about their sexual history than their finances (Discover Society, 2014).
Our second instalment on the topic of money is delicate art of balancing the books. We have this statement called a bank balance. However we often miss the implication in the words: matching outgoings with incomings. The following can help us get to grips with staying on top of that balancing act.
Know what’s coming in and going out.
I became debt free within six months, for the first time, simply by understanding what was happening to my money.
Before you start to budget or even worry about you shortfall, get a real grip on what you get in versus what leaves your bank account. By looking at a 3 month period of your bank statements, you can get an idea of what you are spending and where you’re spending it. Before I did this for the first time, I thought my problem was that I wasn’t making enough money. It turned out I had approximately £400 more coming in than I ‘spent’. So why was I still in debt?
Well, nice chai-lattes from Starcostas and Pret-A-Subway lunches add up. As do penalty fees and parking fines – all unnecessary drains on the budget.
50% of monthly income should cover all your bills.
I can’t take credit for this one – thanks to my Mum and a few other financial principles I have picked up along the way. I try to make sure at half of my regular income meets all the payments I need to make to say living the lifestyle I would like. So that includes rent or mortgages, utilities, travel, council tax, etc. Again, the first time I looked at this, I realised I was paying far too much of my income on just staying alive each month.
If I couldn’t increase my income, I had to reduce my outgoings. Smaller bills like phone bills and utilities can be minimised by taking advantage of a good switching deal. Other bills, like mortgage or rent, could be a longer term financial ambition.
The common trap is credit cards and loans. They are not living costs. They are debt. We’ll come to that later. The other 50% of my income is shared out in different ways to meet my personal life goals. I will go into more detail at the end of this blog. However, one of those areas is being debt-free which, brings us to…
We have debt. That’s it. It exists and everybody has some (or at some point, had some). The other unescapable fact is that because of the way we live in the UK, we will have debt again. Debt can’t be considered as a living expense and therefore should be treated differently. I promise you that you will be surprised how many of us are struggling with debt, simply because we haven’t taken it out of our living cost and dealt with it differently.
Credit cards, overdrafts, loans, etc. Debt comes in many forms. As with your income and outgoings, put a figure on how much you owe. Also assess the interest due on each debt. Then start to do something about it.
Respond to debt.
As optimistic as it is, hoping to win the lottery to pay off your debt is perhaps not the best strategy. Most debt come with interest payments. The simplest thing is to minimise the amount of interest payment on a debt. Find out if you could switch to another provider.
Also, pay off whatever you can; even if you pay as small proportion at a time. Creditors will rather take something than lose out altogether. Get in touch with the people you owe money to. Offer to pay something that you can afford. I have heard of people being able to pay £5 a month until they are able to fully service a debt. Unfortunately, these will often incur interest, but you will have the peace of mind about the debt being taken care of.
Debt consolidation is also an option if your credit rating will get you a loan to do so. Shop around for the best deals and rates. Remember that what you’re doing is swapping one kind of debt for another. The main benefit is you are only liable to one creditor rather than many.
Count every penny.
If you’re having money worries, manage your accounts every day. Think of it in the same way as you would if you were trying to lose weight. You pay close attention to every calorie consumed.
Discipline is the only way to manage our money. However, discipline is not a word that many of us want to hear. For some of us, we so dislike the feeling of watching our pennies that our preferred attitude is to spend our way out of trouble. The more we spend, the less we feel that we’re financially restricted. It doesn’t make any sense but those credit cards are a convenient way of avoiding the issue.
I mentioned earlier that 50% of income should go on living expenses, but what happens to the other 50%? There are different models for money management, here’s one that works for me.
50% – Living costs (see above)
10% – Emergency Fund/Debt repayment. This covers those unexpected bills like car repairs and broken windows. You can also service any debts you have from this portion. Put this money in a separate bank account to use when you need to.
10% – Savings. Some call this the ‘nest egg’. The idea of this proportion is to invest it in a long term savings scheme. The kind of investment that yields dividends in 10 or 15 years at least. It’s surprising how quickly you will get its reward.
10% – Charity. Personally, I feel it’s good to give back somehow. Whether that’s to a national one or a regular gift to friend or family who need it, you decide. You also feel less guilty when you walk by collectors in the street.
10% – Self Improvement. I once heard this called self-maintenance, but I didn’t quite like how that sounded. Anything that helps you grow and become a better person; courses, books, gym membership, conferences… invest in yourself often.
10% You. Not to be confused with the Self-Improvement portion of your income. This is money for shoes, clothes, chocolate, lattes… anything you feel you deserve. You have every permission to enjoy what you have earned through discipline.