Simple money tips by Gareth Salomon, PF Director Limited
What is the single most important determinant of happiness for yourself and your dependents? I would argue it is money. I’m not talking about the short-term buzz that money provides when you buy something shiny. Sure, that can be great. But I’m talking about something else.
A Roof Over Your Head
Money provides a roof over your head, warmth, security and health. These are some basic needs that are all diminished when money is taken away. Of course, money can also allow you and your family to have new experiences in weird and wonderful places (travel restrictions permitting!).
But if money is such an intrinsic determinant of our happiness (and being happy is what life is ultimately about, right?), why is managing money not taught in school? Why is it not taught in college? Why does it not feature in university?
It seems that we have all been left to our own devices to work out how to stumble through the financial side of life. Our parents and those around us largely influence our ability to manage and our attitude towards money. Our innate personality also determines how we look after it. It is, in many ways, a lottery!
Simple Money Tips – What Do I Need to Understand About Money?
For the next three minutes, forget everything you know about money. There is just one simple truth that affects the health of your personal finances: If your average monthly outgoings are more than your average monthly income, you need to do something about it. Now.
If you are spending more money than you are receiving in income, your money will run out at some point. This situation will lead to you spending someone else’s money instead (eg the bank’s or a credit card provider’s). How quickly your money runs out depends of course on how large your bank balance is and how many years you have left until retirement.
1. But what does this mean in practice?
When you see something new and shiny, it is not enough to just glance at your bank balance to determine whether you can ‘afford’ it. Your current bank balance does not show the full picture. If this is how you are making spending decisions, you currently have little control over your money. Your immediate wants are almost certainly blindsiding you too.
So what can you do to get control of your money?
2. Categorise your personal outgoings
Look at every transaction that went through your bank account(s) during the last full month.
Use an app, spreadsheet or pen and paper – it doesn’t matter which (although it helps to choose whichever method makes the process simplest for you with your level of technical knowledge).
Assign each item a category, eg rent or mortgage, electricity and gas, water, council tax, telephone, weekly supermarket shop, takeaways, Netflix, cinema, restaurant, fuel, parking, etc.
Add up the total for the month for each category.
3. Split the categories between mandatory and discretionary spending
For each of the categories created, work out which items are:
- ‘mandatory’ (items that you must pay each month, eg rent, council tax, water rates etc).
- ‘discretionary’ (items that you don’t have to pay each month, eg restaurant and cinema).
You will note that there will be a lot of grey areas: fuel and parking for example. If you had to, you could probably use the car less. These grey areas are fine – just be aware of them for the next step.
Analyse Your Position
You may have noticed that your total spending for the month is more than your income. Don’t get alarmed if it is.
Hopefully, the total value of your mandatory spending is not more than your total income for the month. If it is, however, there will be more difficult considerations that you will need to make. These could be ‘do I need a better paying job?’ or ‘do I need to downsize my house?’.
Deduct the total mandatory spending value from your total monthly income value. The result will be the amount of money that you can spend (ideally saving a portion too) each month without reducing your overall bank balance.
Once you have this value, you can work out which of the discretionary spending, the things you choose to spend money on, are most important to you.
Which of those items can you reduce or perhaps even eliminate while still maintaining a standard of living that you are happy with?
There Is No ‘Right’ or ‘Wrong’
Everyone is different with differing needs.
The above process is not about saying you cannot spend £30 on a takeaway three times a week. It is about being aware of the financial consequence of having those three takeaways over the long term – it is £4,680 a year by the way!
It is only when you crunch the numbers and have them sitting in front of you, that these figures hit home.
This heightened awareness will help you to make better decisions when it comes to spending your hard-earned money. Additionally, it will greatly reduce the risk of you getting into debt in the future.
Simple Money Tips – One Final Thought
You are in control of your money – no-one else.
Money determines the level of freedom you and your family have to do what you want during your lifetime. It is that important.
These are your simple money tips for 2021! Good luck!
About the Author of Simple Money Tips
Gareth, FCA, BA HONS, was born and lives in Wrexham. He is the founder of PF Director Limited – intelligent advisory software for accountants in practice.
Visit his website at www.pfdirector.com
You can email him at gareth@pfdirector.com or call him on 01978 897 395.
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