The first steps towards financial planning

In my last blog I implied that one of the biggest barriers to financial planning is financial management. If you can’t control your monthly budget then the idea of a long-term financial plan seems crazy. Often we skirt over the monthly budget and actually as we struggle daily our long term outlook gets worse.

I go back to what the IFP (Institute of Financial Planning) was saying about how many of us worry about money, it is a frightening statistic and actually when you hear so many people saying that Christmas is cancelled this year there is a general air of pessimism. (Although, to be fair Christmas cannot be cancelled - just perhaps the giving of presents!!!).   

So how do we tackle our monthly budget – I want to explore the basics of financial management and with this blog I want to start at the very beginning.

Knowing what your monthly income and expenses are

I recently spoke to a friend who was going through this process, and he found there were payments he was making that he had no idea what they were for. So, although this can be hard this is the first step.

So here is my summary of how to approach this:

1. Find time, this will take more than a quick ten minutes!!!
2. Draw up a blank financial statement – there are various examples of these, and you can produce one on an excel spread sheet, or word. Personally I use an excel spread sheet. To get you started it is worth looking at this budget planner on the Money Advice Service (click to view), or you can find examples on the CAP UK website (click to view) and also IFP (click to view).
3. Find all your financial paperwork, this will include bills, bank statements, wage slips, benefit letters and any statements of bills.
4. This is a personal thing, but whether your money comes in weekly, fortnightly or monthly always view it as a monthly payment. For weekly or fortnightly payments convert these into monthly payments for the purposes of the calculation. CAP UK use a simple calculation for this, for weekly it is a factor of 4.33 (i.e. £100 per week x 4.33 to get the monthly figure), and for fortnightly 2.165.
5. Enter all the money coming in on the financial statement you are using. Sometimes we receive irregular payments like overtime and bonuses, because these are unknown amounts I tend to ignore these because these are not guaranteed. However, if you get known regular amounts then take the last 12 months and divide the payments by 12.
6. List what you spend each month or week on everyday living and essential bills. In all cases work out weekly or fortnightly amounts as monthly calculations. This varies depending on the tool you use, for example CAP UK ignore things like cigarettes, alcohol etc whereas others go down to the smallest detail. Personally for the weekly outgoings, I focus on just three areas – food, fuel for the car and spending money (so this covers anything like going out etc).
7. In considering your everyday living and essential bills remember to include irregular expenditure or monthly payments. This is really important – monthly payments are likely to include things like your gas and electricity, cable services etc and irregular payments are things like birthdays, Christmas, road tax, car MOT and maintenance etc. So think of everything you spend throughout the year – we tend to cover clothes within this as well as school trips so be honest on this.
8. If there are payments going out that you don’t recognise then call the company and find out what they are, if they are not essential then you may wish to cancel these but I will look at this in more detail in my next blog.
9.  Debts – the recommendation is that you list your priority debts.  I will not pretend to be an expert on this, one charity I have seen that may be able to help is CCCS (Consumer Credit Counselling Service) – (click to view). But the general recommendation is that you list all your creditors and you find out how much you owe, call them and ask the question explaining you are struggling to pay down your debts. Don’t agree to any repayments when you call as this is where people like the CCCS can really help. Priority debts are classed as rent / mortgage / secured loans, court fines, council tax, maintenance / child support, gas / electricity, water, benefits overpayment and hire purchase. Non propriety debts are any other debts so credit cards, loans, over drafts, store cards etc.

Hopefully what you now have is a list of income and out-goings as well as details of any debts. The next step is to make the financial statement balance. In my next blog I will look at this in more detail.

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