[toc] The first two articles in this series will have given you a small insight into how different organisations and individuals arrange their borrowing and highlight some of the benefits that properly controlled borrowing can provide as well as showing how easily things can go wrong.
If you are finding your situation has changed or simply that the repayments on your loans are becoming worryingly stressful, then this article may help you to find a better way forward.
Changing spending trends
With banks becoming resistant to issuing monthly statements and most people now using credit cards or debit cards for their day to day purchases rather than cash, it is of little wonder that peoples general awareness of their day to day spending has all but evaporated.
Where anyone is finding that their monthly outgoings are starting to match their total monthly income, then their priority should be to start putting some checks on their spending in place in a way that will give them a clear picture of where their money is being spent.
It can only be good practice for anyone, to routinely check, at the end of each month, where their money is going and to understand fully the relationship between their income and expenditure. This approach will also identify that what has been charged to your account is actually correct.
Doing this in a way that highlights the spending on essential items and non essential items is good practice, as being aware of what can be saved should an unexpected event occur will help establish an earl solutions.
Having access to this information will pre-warn you if your spending is beginning to run out of control or, if you are becoming concerned that you are getting into an unmanageable debt situation then you will have the information to hand to enable you to work out how to sort the problem.
Making a start
We have highlighted below, some simple tasks that should help you gather the information you will need.
- Income – Make a list of all of your sources of income, net of tax, including salaries, state benefits, pensions, income from investments, company dividends etc., etc. As some of these incomes may be annual or bi-annual, calculate each income source on an annual basis and divide by 12 to give you an accurate monthly income. If using our ‘free Income and expenditure spreadsheet’ then these special incomes can be set in the actual month they are paid, giving you warning of when this income boost will arrive.
- Essential monthly costs – These should be all of those items that are fixtures each month such as council tax, household rent or mortgage payments, home insurance payments, TV licence, household food, utilities bills etc. These items represent your basic cost of living and form the basis of your expenditure that cant be easily reduced.
- Transport costs – This should cover all transport costs from public transport and air travel to cars and other vehicles. Include with cars and other vehicles, any loan repayment costs, insurance, road tax, MOT, repairs and fuel costs. Add up the annual costs of these items and divide by 12 to give the average monthly cost. Again, if using our ‘free Income and expenditure spreadsheet’ then these costs can be placed in the actual month they have to be paid, giving you advance warning of when high bills might apply.
- Loan Repayment costs – Excluding mortgage repayments and car loan repayments, list all monthly loan repayments, such as those to credit cards companies, to banks for personal loans and overdrafts and to hire purchase companies and any other creditors that you may have.
- Ensure with these loans that you take note of the applicable interest rates that are being charged and the outstanding time left to complete the repayment. Debts that are bearing the highest interest rates should be the first to clear.
- Non essential spending – Make a list of what you spend on clothes, personal items, coffee shops, restaurants and entertainment, magazines, drinks and cigarettes, etc., etc. On these items, it is essential to be completely honest about your spending as this is a key area where it might be possible to reduce your spending and find the funds to resolve any spending crises. If using our ‘free Income and expenditure spreadsheet’ then provision for these costs is set out for you in a way that will let you see it at a glance.
- Holidays and special events – Set out what you will spend on Christmas, birthdays, annual holidays and any other special events making sure that you include and spending on things you will buy inclusive of drinks and entertainment that is over and above that listed under Non essential expenditure. Again, if using our ‘free Income and expenditure spreadsheet’ then these costs can be placed in the actual month they have to be paid, giving you advance warning of when high bills might apply.
Free Income and Expenditure Spreadsheet
Although the above tasks should be fairly straightforward and in everyone’s interest to do properly, it may prove to be a daunting task for many people who are not used to this sort of analysis. We are very aware that being able to set these figures out on a spreadsheet can be a great asset which lends itself to easily altering figures to see what the effect of a change could do for your financial well being.
With this in mind, we have created a simple spreadsheet which is set out to accumulate this data and show the results in a straightforward way. If you are able to use spreadsheets, then we can send you a copy which will let you set out your own data and keep it updated.
To learn more about this spreadsheet and request a copy, please see Part 8 of this series.
Reviewing your data
Having carried out the above review of your current income and expenditure, you are now in a position to properly assess if the figures present you with the prospect of being able to reorganise some of your least important expenditure to enable you to achieve a positive cash flow position. That is where your income generally exceeds your outgoings leaving you in the situation where you are able to meet all of your obligations, allowing you to grow your savings over time.
Taking Action
Having carried out the above task on paper or, if you have benefited from using the our spreadsheet which gives you the facility to instantly see the effect on your finances from small adjustments, you should now be able to identify where you are overspending. Hopefully, that will bring you back to a positive cash-flow position and remove your debt worries.
However, should you find that there are not enough areas of spend that can be reduced sufficiently to solve the problem, then more drastic action may be needed.
In (Part 7) of this article, we take a look at some of the options that may be available to you.