Where has all my money gone?

We are now half way through what is widely regarded as the most depressing month of the year, January! Personally I find January a great time for rebirth, re-growth and renewal. To this end I have decided to take my own financial advice and keep a record of every cent I have spent since the start of the month. Now I agree this is hardly the most exciting way to spend those long, dark January nights when all you can think about is the hot water bottle and some comfort TV, but bear with me.

For the last number of years I have attempted to get good control and proper management of my finances. My motto has always been to try and make the money I work so hard to earn work harder for me. I have kept reasonable control on my monthly spending, but just keeping a record of everything I have spent since the start of the month has been a revelation. Two things really stand out:

1. You spend less: The simple process of recording everything you spend really makes you tighten your spending. It’s totally psychological but if you have to record everything you buy you tend to really consider all purchases. At the weekend I was about to buy yet another work shirt for EUR 55 and then I just asked myself, James you already have ten shirts for work why the hell do you need more! Having to write things down acts as a value check on your spending.

2. You identify your weaknesses: For the longer term this is probably more significant. Certain patterns emerge regarding your spending. For example I realized that I spend far more at the weekend than I thought. I have been kidding myself that a Saturday night out cost EUR50 when in actual fact I withdrew 50 at 9.30pm and another 50 at 1.30am!!!

Understanding where your money is going and where you can make real long term saving will greatly help improve your financial health in 2008.

So go ahead, start today, write down every single purchase for 1 month, I guarantee you at the end you will have saved money but more importantly will start to get a real handle on where your money is going. If it worked for me, it can work for you.

Financial Makeover Part Two

I hope all our keen bloggers have completed their homework and now have a more realistic view of their finances.

Now we move onto the second step of the budgeting process. Allocating your income.

As we pointed out in the previous post, our philosophy is to treat personal finances the same way the professionals treat theirs. By saving and managing your money effectively over a twelve month period and by planning expenditure for the following twelve months, you can avoid credit card and other high interest debt and ensure that you can pay your bills on time and still afford that holiday in the sun.

Short term expenses: These are your regular monthly bills: mortgage/rent, phone, shopping, electricity, gym membership, car repayment, any loan repayment etc. These expenses will be paid monthly directly from your current account.

Medium term/long term expenses: These expenses, such as car insurance, house insurance, summer holiday, any planned home improvements, estimated doctor/ dentist visits, clothes, should be totalled for the entire year and divided by the number of months remaining in the year. This calculated amount should then be transferred from your current account into a “savings 1” account which you should set up through your bank.

By setting up a savings account where you have instant access to your funds, you will benefit from a higher interest rate on cash you will have transferred there during the year. As these bills fall due you can then pay them from this account.

Of course not all annual bills fall due in December, therefore you will need to plan the amount to be transferred based on when bills fall due i.e. should you require 1000 for your car insurance in May you would need to save 200 a month towards this.

Discretionary income and investment: The remaining amount should be transferred to a “savings 2” account. This account can be investment in pensions/fund/ property and should represent your long-term savings/retirement/investment plan.

It is very important that all short-term debt such as credit cards, personal loans, car loans be repaid BEFORE you begin investing. Remember the bank will always pay you less interest than it's charging you, that's why they make massive annual profits!!!

Starting this process as soon as possible will help you to get far greater control of your finances and hopefully create good financial habits that will ensure you continue in good financial health throughout 2008 and beyond.

Financial Makeover - New Year, New You

Everyone knows that Christmas can be tough on your finances. Aside from all the presents and socialising, many people’s household budgets go out the window over the festive period, leaving them wondering what they spent all that money on. But all is not lost – the New Year is a great time to makeover your finances and plan for the year ahead so that you can manage your money, sort out your debts and meet your financial goals in 2008.

Start budgeting:

Decide now that 2008 will be the year your finances get in shape. During the next few weeks we will be providing numerous ideas and tips to help you get your finances in line.

Our philosophy is that personal financial management should take its lead from the professionals. In business, financial management is not simply about managing day to day cash flow but rather monthly, quarterly and annual budgeting; setting aside sufficient cash to ensure a year of no surprises where all income and expenditure has been foreseen with a contingency set aside for any unexpected bills.

People effectively "cash account" with the money they earn. They concentrate simply on the short term, pay the rent/mortgage, pay the car repayments, the electricity and other utilities and then anything remaining is simply discretionary income. They feel they have the safety net of their overdraft or their credit card should any big bills come in. This is a naive and potentially risky way of dealing with your finances.

Our approach, which takes its lead from big business, is to plan for the next twelve months setting aside sufficient funds each month to cover those annual bills as well as budgeting effectively on a day-to-day basis.

First three steps

Identify the following:

1. How much you are earning
2. How much you are spending
3. What you are spending your money on

It is vital that you are honest with yourself even if you discover you spend 50% of your income on pick and mix! Avoid the mistake of overestimating your income and underestimating your expenditure.

Once you identify where your money is going you can see where you might need to make adjustments so you can achieve your goal of a year with healthy personal finances.

So your homework for the next few days is to sit down, take a page of A4 paper draw a line down the middle. On one side list any and all sources of income and on the other all expenditure. The idea is to include as much detail as possible. Include day to day spending, mortgage/rent bills as well as annual items such as car insurance, gym membership and any other expenditure you can foresee for the next twelve months. For items that are difficult to value such as weekly shopping bills etc., estimate them as accurately as you can.

This cathartic process is a major step on the road to financial recovery and good health.