Money Management
This section is mainly about getting in control of your money, and feeling empowered to manage it yourself.
You’ll hear and see the word “Budget” everywhere in this context, but it doesn’t have to be as complex as some make out!
Contents
Creating a Budget
A budget is a plan or estimate for income and costs over a period of time.
Actual income/cost can then be tracked against a Budget (see the next section on this).
1. Review your current income & expense
- Write down what income and expense you currently have (review the last few months of bank statements).
- Include payments towards credit cards, student loans or other debts too.
2. Choose your Budget categories
- Look at the types of things you spend your money on.
- Some category examples include: rent, mortgage, utilities, groceries, meals out, fuel, car lease, holidays, presents, charity donations, phone bill etc.
- Group all of the income/expense you noted in step 1 into the categories (eg council tax and electricity might go into the “utilities” category).
3. Set a Budget per category
- Choose a monthly amount for each category of what you would like to spend.
- Assuming you have a regular income (eg wages or salary), this typically is a fixed monthly amount.
- Check that your expenses don’t exceed your income each month.
- There might be some months where you have a higher expense (like a holiday) which is a one-off.
Useful Links
Watch the Make My Money Work video on YouTube about Budgeting.
The Money Advice Service – Budget planner – this is a month in-depth alternative to planning your Budget, and allows you to save it in an online account.
Money Saving expert also have this Excel download Budget template – try different formats to see which one works for you.
Managing a Budget
You’ve set a Budget. Brilliant! Now what…?
A Budget is only worthwhile if you track against it, ie measuring if you are above or below Budget each month, and if you are saving the amount you were targeting.
From the section above, we know the first 3 steps here:
The 4th step is tracking what you are spending.
As I mention in this Budgeting video, you can do this via one of the following options:
1. Notepad and pen
The simplest of the 3 options, but probably the least dynamic, a good old notebook and pen can be put somewhere you’ll spot it and remember to update your expenses!
2. Microsoft Excel (or equivalent)
My personal preference, a computer based spreadsheet like Excel does all the heavy lifting for you, making setting categories and adding up / analysing the data super easy.
3. App
The final convenient option is an App on your phone or tablet. Most banks now have this functionality within own App to set and track your spending. Check out the post “Should I use a Finance App? here for other App ideas.
If you find you are exceeding Budget for 1 or more categories, 1) check you have set a realistic Budget for that category, then 2) you may want to make changes to your spending habits.
Some tips include:
- Check for any direct debits you no longer need (and cancel them!).
- What could you get for cheaper? Utilities and phone bills are the easier ones to go after here.
- Monitor the little expenses that add up – daily coffees and lunches purchased rather than bringing your own can make a big difference!
- If you need to go bigger, review those luxury items (meals out, clothes, holidays etc) and be strict on how you could minimise the costs.
Useful Links
Money Saving Expert have some further tips on reducing your daily costs.
See the Make My Money Work version of Budget and expense tracker here:
Why you want Emergency Savings
Life has a tendency of throwing unwanted surprises at us now and again (like suddenly needing a new boiler!).
Emergency savings is exactly that – some (easy access) savings ie cash, that you can use in event of a financial emergency.
Short term: 3-6 months of expenses
For shorter term emergencies, Hargreaves Lansdown suggests creating an “emergency fund” of 3-6 months of expenses.
This could cover something like a boiler replacement (then top the emergency fund back up afterwards), or even something more serious like job loss (giving you time to find another job in 6 months).
Long term: 20% of your income
In the MMMW Budget video, I talk about how many people suggest saving/investing 20% of your income (if possible) for the long-term. Use the tools in the Budget section above to see how you might be able to achieve this (or more?).
The rationale for the 20% is that the average person needs to spend 50% of their earnings on essentials (rent/mortgage, food etc) leaving 30% for non-essentials and the remainder for savings. Remember this is just guidance, and not a rule for all!
It’s also worth considering any specific savings targets in the near future (eg a wedding, a house, or a holiday), that might change your savings goal for a period of time.
Useful Links
Try the HSBC emergency savings calculator.
Using an App to manage your money
There are loads of money management Apps that can help you budget, keep track of your finances, or in some cases even generate money (though be wary of these – if it sounds too good to be true, it probably is!).
Is it safe to use an App when it comes to money?
Depends which App you pick – check if it’s governed by the FCA (Financial Conduct Authority) to ensure the App is authentic.
Which App should I use?
This is completely down to personal choice! Think about what you need the App to do for you, and download a few different ones and trial them out to see if helpful.
Downloading the App from your banking provider also gives you a quicker way of checking your finances compared to online banking (via eg a laptop) – you’re probably more likely to check your bank statements on your phone than logging onto a computer!
For some ideas and thoughts on App money management, check out the MMMW blog post on “Should I use a finance app?”, including a few App suggestions to get you started.
Using a Professional Advisor
For your finances, a Professional Advisor here would be (you’ve guessed it) a Financial Advisor!
Service provided
Firstly it’s worth defining what a financial advisor/planner actually does when they give you finance advice.
Essentially they should help you plan your finances in the short, medium and long term, including planning for significant future life events like buying a new house/car, having children and retirement (to name a few). This is ultimately a mega version of Budgeting!
In most cases the main other elements of financial advice include advising on savings/investments either for income now or retirement (ie pensions), and how to do efficient tax planning (eg management of inheritance tax).
Costs
As with any professional service, there is an associated cost with getting finance advice – the Money Advice Service estimate in the UK that this costs on average £150 per hour.
However there are a few different types of ways you may pay financial advisor fees, including: an hourly/monthly fee, a one-off fee for a specific piece of work, or a percentage of the money you invest.
Reasons for getting a financial advisor
- You don’t want to do your own finance planning (as described above).
Yep that’s genuinely the only reason I’m going to list! You COULD research everything money related, and be your own financial advisor if you really wanted to. Ultimately you are paying for the expertise and the convenience of someone else doing it for you.
Many advisors will do an initial consultation for free (trusty Google is as good a place as any to start finding one), though as with anything service related, even better if you have a personal recommendation.
Useful Links
[Insert links]
Bankruptcy
Bankruptcy is one way for individuals to deal with debts they can’t pay (normally worse case scenario after all other alternatives have been explored!).
The below are some general points to note:
- Bankruptcy only covers certain debts, and after a year they are wiped off once your assets have been used to pay off as much as possible. Citizens Advice explain which ones it doesn’t cover.
- You’re allowed to keep certain things known as “exempt goods”, for example everyday household items (clothing, bedding, furniture), tools you need to do your job, a car if you need it to get to work or you’re a carer (and it’s not worth more than £2,000). Non-essential assets (things that you own) may also be sold to cover the debt.
- You’re allowed to keep a “reasonable amount” from your income to live on (assessed on a case-by-case basis).
- Income is managed by a named “trustee”, who once you declare bankruptcy essentially takes over managing your money / bank accounts. They will release money for essentials like food.
- Property – if you own a house this can be sold and used to cover the debt. If renting, then any unpaid rent is covered by bankruptcy, but the landlord can evict you.
- Car – if a car is needed for your job, then a low value one can be kept, or if on lease then payments can be made if released by your trustee. If a lease monthly payments are high, and it doesn’t cost anything to exit the lease, you will be required to do so.
Useful Links
- GOV.UK
- Citizens Advice
- Money Advice service – free advice either online, via phone or in person.
