For those who are new to my blogs, welcome. You may be asking why I have started with exploring the concept of financial management. The reason is simple I believe that unless your day to day finances are under control then you cannot even consider financial planning. The IFP recently released some worrying statistics showing over 50% of men and women worry about money. For financial planners we need to be aware of this especially where income drawdown under the new rules can see income being cut by 30% plus and annuity rates plunging.
Before I look at the second part of my blog I came across across these statistics on the “your money update”:
- 57% of families say that have been affected by the economic downturn
- 68% reckon the recession has left them with less money in their pocket at the end of each month
- 66% of families are shocked at the size of their household outgoings
Although I talk about debt which is a worry for some people, we need to understand that our clients may be struggling with reductions in income or just increases in cost and this is where knowing the concepts of financial management is so important.
When I talk about financial management, I find the hardest thing to deal with is the unexpected. This can be the changes as a result of the budget (or autumn statement being topical), rises in fuel costs, or just those unexpected costs like an expensive car repair bill. Certainly this has to be part of general financial management which is to have a slush fund for the unexpected but first we have to work through the day to day management.
In my last blog I explored the general starting point of identifying all income and then outgoings. Often what we can find is that outgoings are greater than what is coming in. What I don’t want to do is go into too much detail around debt because as I have said before I am not an expert on this but if someone is in this position then they should contact charities like CCCS or CAP UK who can help.
When looking at the financial statement what needs to be done is to prioritise the right things to ensure an acceptable standard of living. Below are some thoughts on what may be classed as acceptable costs, and how to approach any potential savings:
- Food and household – this depends on the number of people in the household but for a family of four, this can be in the region of £100 - £110 per week. It doesn’t sound a lot but I remember hearing that if you plan your meals in advance and buy only what you need this can significantly reduce your cost
- Car and travel costs – we are very lucky because we live close to a city so we can cut down on fuel costs, so our budget is £20 per week for fuel. We don’t take public transport and use bikes to get around where possible. So this is very dependent on your circumstances
- Living expenses – consider what is reasonable per week; within this consider leisure activities and general daily expenses. Remember where cutting down outgoings then certain things will have to go. So this could be in the region of £50 - £80 per week – or it can be less where the belt needs to be tightened further
- Regular payments – I am a great believer that any regular payments like gas, electricity, phone, water etc should be paid by direct debt. In a lot of cases there may be no additional cost for doing this but even if there is then it may be worth doing just because it is easier to manage outgoings
- Debts – speak to registered charities that can help manage debt payments but the key is to pay down these debts as quickly as possible. They will help come up with a repayment programme which can be built into the budget
- Monthly payments which I think can reduced – although you can reduce your gas and electricity bills by switching I believe the difference between companies is very small, where I target tangible reductions in monthly bills are:
- Landline and mobile phones – if you are coming to the end of the contract then negotiate a better deal. To provide some examples, although it is nice to have a swish phone you can get sim only contracts for as little as £5 per month, likewise from experience you can do deals with your landline and broadband provider to significantly reduce your monthly bill (I recently reduced this by £10 per month)
- Building and contents insurance – I have never been a fan of comparison sites but actually insurance companies expect us to do nothing at renewal but I would argue that you need to look around, I recently reduced my monthly insurance by 50% and now have better cover
- Cable / satellite TV – I have always seen this as a luxury, this can be reduced significantly if you take free view or reduce your package
- Life insurance and other insurance cover – this is where a financial planning can help significantly, find out what is needed and then see if you can get cheaper deals. In a lot of cases if the same benefits can be found on the NHS then why pay for private cover; certainly at this stage I would see this as a luxury. As a little bit of controversy I would say at this stage anything like pension planning and future needs may need to be put on hold whilst the plan is put into place
- Gym membership and other leisure activities – for many these are the one release they have from everything however these can be expensive. So reducing these costs has to be an area to target
- Mortgage payments – for those with mortgages, it may be hard to re-mortgage but it is worth seeing if payments can be reduced. Obviously with rent this is harder to do
- Child care, school costs and maintenance support – these are fairly fixed costs so there is always little movement on these but school costs can be targeted
- Other costs like TV licence, water costs etc are unlikely to provide little options for reductions
Yearly costs – budgeted for monthly
- We have costs which happen throughout the year but unless we budget for them then we will struggle to pay for them. Below are some ideas and it may be that some of these are reduced or removed
- Holiday – we all like our holiday but in reality if we are spending £2,000 a year on a family holiday (including spending money) that is £166 per month, can this be reduced?
- Household maintenance / slush fund – this is worth having but be realistic on what can be afforded and what is expected to pay out
- Christmas and Birthday – work out how many presents are needed and set a budget for each person (including family), also build into this any cost of children’s parties and the cost of entertaining for Christmas. It is interesting to see so many people don’t actually do this
- Clothing / footwear – think through the costs, remember certain items like children’s shoes are expensive but charity shops can reduce these costs significantly
- Car maintenance – so MOT, insurance, maintenance and breakdown costs
Once the process is completed and cut backs where appropriate have been made then hopefully the outgoings and income should balance. This part of the process is perhaps the hardest, particularly where there is significant debt to pay back, but the key has to be to reduce down that debt.
This is not an exhaustive list but hopefully it starts to open up the thought process. Some people reading this will be financial planners, but whether you are a financial planner or not, have a think on what works for you and share these thoughts.
In the final part of these series of blogs I will look at how you set up and manage these payments. I will then move onto the concept of financial planning.
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