There are a lot of investment bankers and other pinstriped types who are suddenly finding themselves with a lot of time on their hands, and they shall undoubtedly turn to blogs like mine for tips on how to cope with their changed circumstances.
Right now, I feel ever so slightly smug about AJ's and my ability to manage money. Clearly some very clever and important people aren't nearly as good at this as we are. We have been very fortunate in some respects, but we have also worked hard such that we have never owed money and we have always had a small float to cope with unforeseen circumstances.
This post was going to be The Goldfish Guide to Living Within Your Means, but actually the most important thing that we do is proper bookeeping. And since this takes a bit of instruction and if you're not interested then it's going to be unreadably dull, I thought I would give it its own post.
Knowledge is power, and the most important step towards living within one's means is to know exactly how much money you have, how much is coming in, and how much you are spending. I am absolutely amazed that other people don't seem to do this, even when they are worried about money. What's the point in worrying when all the information is available to you, should you be bothered to put it together? Now we've all got computers, you don't even need to do the adding up.
Here is the way I do it, although there are other ways:
I have two spreadsheets; our Budget, our Accounts.
The Budget one involves four columns and two sections. The first column is the name of the item, then weekly amount, monthly amount and yearly amount. The first section is Income, which involves four different items because of our various benefits. The second contains all our Fixed Outgoings (rent or mortgage, utility bills, insurance, Council Tax, annual MOT etc.).
Different items come in or go out at varying frequencies, For example, rent is every month, contents insurance is once a year. To fill the three relevant columns, I enter the known figure and use the following formulae;
weekly sum = monthly x 12 / 52 or yearly / 52
monthly sum = weekly x 52 / 12 or yearly / 52
yearly sum = week x 52 or monthly x 12
At the bottom of each section, I find the total for each collumn and then at the bottom of the spreadsheet I find the differences between these totals. So I know how much money I have left over after my bills are paid each week, each month and each year. I thus know exactly how much I can afford to spend on food, clothes and sundry expenses without going into the read.
These are absolutely crucial figures. For example, if you know you have roughly £50 a week to spend, then you could be overspending if the real figure is £48 and worrying unnecessary if the real figure is £52.
Another very useful feature of having the Budget is to save up for the annual expenses. We pay contents and car insurance in two annual chunks, plus our heating is oil-fired and it is much cheaper to pay for the oil outright when the tank is filled (much cheaper being relative considering how dear the oil is). If the money is tight, one is unlikely to be able to accumulate enough of a float to cope with these.
So instead, I add up these one-off annual items and divide by twelve. I then have a standing order such that this amount goes out of our account each month and into another account (banking on-line this is a doddle to manage). This way, we are paying for everything on a monthly basis.
The other spreadsheet represents my Accounts. I have two accounts because we use a credit card which we pay off every month in full (we get dividend). The sheets for these are the same as one another.
Five columns; Date, Item, In, Out and Running Total. We used to have a column for cheque numbers but we only write cheques once in a blue moon now. You start your Running Total column with the balance at the end of your last bank statement. Then, assuming that you've started at the top left hand corner of the sheet, you put =D1+B2-C2 into D2. If that makes sense. You then drag it down the column.
You then put in everything you know is going to happen for the month, so all your fixed income and all you direct debits and so on, complete with the dates – it is vital to keep all the data in chronological order so that you know how much you'll have throughout the month (if things get messy, you should be able to sort the data by date (ascending) using the spreadsheet program).
Then you add everything else you spend as you spend it. This is a bit of a chore, but it is necessary if you have any concerns about going into the red. When the next bank statement arrives, the new balance should be exactly where you thought it would be. And at any given point in the month, you know exactly what you've got to spend.
This way you learn the pattern of the month, you know when your balance peaks and when it gets ropey. It's also a failsafe against fraud. This may sound melodramatic, but it does happen and if a penny goes out when it shouldn't, you know straight away.*
However, the most important thing is that you know where the money is going. It is very easy to loose track on spending – I'm not talking about excess, but buying a few bits and pieces at one end of the month and then wondering where your money went by the time you get to the other.
* Oddly enough, supermarkets frequently over or under charge us by a penny or two. Not that I'm so petty as to complain about it.
I've got a trick to add: I keep two separate balances for my current account. There's a small one in the "front" of the balance book that covers the money I'll need for a month, plus maybe a little extra. Then I keep a larger balance on the last page, which I basically pretend isn't there. Every month, we throw a portion of hubby's pay into "the back" and forget about it. Occasionally I'll draw on it to pay for something big, but generally I leave it alone, and let it accumulate; then every so often I'll chuck some of it into savings. I don't know why it works, but it does. :)
Nooooo! You can't tell people how to do their own book-keeping, I'll be unemployed :(
Nah, I agree that it's surprising how little attention some people pay to their money. I was amazed to find one of my nearest and dearest didn't go through each line of his bank statements to check all the transactions were legit, until I realised he actually files his bank statements unopened "because he knows he's overdrawn" - at that point I nearly fainted and battled for custody of the said bank statements...
If anyone in the UK has got their money in a mess, I recommend you have a read of this page if you haven't already and see if you can claim any bank charges back. Apologies if, like, you already read it two years ago but I only learnt about it recently and have been meaning to share it on my blog, except I'm not going through an English sort of phase so it would be fairly pointless.
Your blog doesn't like my html btw :(
It's the only way to cope on a low income.
A practical measure which I found helped was to pay any non-fixed-amount things (like groceries) in cash and only allow myself a fixed withdrawal from the cashpoint once a week (just before buying my groceries, as this was my biggest cash expense). Doing it once a week means no end-of-month poverty, but also no beginning-of-month "I have £50 in my wallet, I can afford this thing costing £1 and that thing costing £2.99... oops, it's all gone now."
Interesting post - I do something similar, but use two accounts - income goes into one, which has all the fixed outgoings, including a standing order to the other. I find that this is easier as it measn that I only have to budget for food, fuel and luxuries, out of the 'day-to-day' account - it makes it easier to avoid going over drawn.
I deal with other people's finaces a lot as part of my job - it terrifies me how many people have no idea about their own finances (even down to not knowing whether they have a repayment or endowment mortgage, or how much it is) Scary
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