Do you struggle with handling your finances? Follow this guide to improve your money management, so you have more to spend each month and a stockpile of savings to put toward your future financial goals.
Create a Budget – and Stick to It
The first step to taking control of your finances is to create a budget – and stick to it. Calculating your expenses and setting these against your earnings gives you a clear idea of whether you’re in the black or in danger of debt.
Start by working out your monthly salary after tax and any other deductions such as pension contributions. This is how much you have to spend. Next, list out your monthly expenses, prioritising essentials such as rent or mortgage payments, bills and living costs. You should also include any outstanding debts.
Remember to include a buffer for major expenses that occur periodically throughout the year, such as your car service and tax and annual insurance policy renewals. What’s left of your salary once you’ve taken into account your essential expenses is what you have to freely spend or save.
You can use computer programs like Excel to create automatic calculations for instant visibility of your finances even if costs change. There are also apps that you can download to your smartphone, so you have instant access to your budget even when on the go.
Reduce Your Debt
Carrying debt into each month can be an enormous drain on your finances, especially if it’s from a short-term borrowing option where interest is high. If the interest charged is higher than the interest you earn through savings, you’re actually losing money month-on-month by ignoring it, so do your best to reduce bad debt as quickly as possible.
‘Bad debt’ includes money owed on credit cards and overdrafts which can accumulate quickly. If you have multiple debts, consider debt consolidation loans which unite the money owed into one manageable monthly repayment. Calculate a fixed repayment scheme – ensuring it’s affordable, factoring in the interest – to clear outstanding costs quickly.
Long-term borrowing with fixed agreements such as mortgages is considered to be ‘good debt’ and can be paid off more slowly, following the agreed repayment plan.
Build an Emergency Fund
Adults are recommended to have at least the equivalent of three months of salary in savings as an emergency fund. Once you’ve got on top of budgeting and your debt has been resolved, work on building this fund so you have financial security should the unexpected occur.
There are several different savings methods you could try such as the 50/30/20 rule which has been widely promoted this year. Using this method, 20% of your earnings are separated for savings, a decent chunk that will soon lead to a healthy emergency pot.
Remember to consider long-term savings as well. Write out your financial goals, such as buying a new car, owning a property, and funding children through university, and calculate how much you need to achieve them. You can then work out a savings plan with a target timeline to motivate you to spend less and make these aspirations seem achievable.
