Stemming the Flow

Following on from last weeks article on financial management ‘The Truth Will Set You Free’ here are some thoughts about managing the flow of money.

You see the real problem with financial management is typically not the money that is coming in but the money that is going out. That’s why last weeks blog, my first specifically about money management, focused on creating a record of what was being spent. I truly believe that is the first step towards financial freedom.

A useful step after that is to look at the out goings and ask some hard questions about each and every item on the list.

There are a couple of catagories or levels of expenditure into which we can all put our spendings.

The first is ’survival’ spending. These are the essentials for living – housing, food, water, power, fuel (if used to get to work) and housing taxes.

Now if times are very hard, for example if you have been made redundant then consider where you can minimise these survival costs however ideally you want leave these costs alone.

Also typically it is not these expenses that push peoples incomes into the red. More often it is the next catagory up – ‘non-survival’ expenses or ‘optional’ expenses.

I’ve chosen the word ’survival’ very specifically as I would like to stay away from the ‘essential vs non essential’ argument. Also I think that ’survival’ more accurately portrays what those first expenses are all about – you can live a life, it might not be comfortable but you will have the basics for living with those covered. Everything there after is non-survival or ‘optional’.

So your next step should be to revel each item that is left on your list and seriously consider can it be reduced or cut out. Cutting out an optional expense can be hard and if you doubt this then let me give you the simple example of cutting out your mobile (cell) phone.

Many people will state clearly that their mobile is an absolutely necessary – well sorry but it is rarely a survival expense but as an optional extra I concede it might be useful, maybe for job hunting or other justifiable reason. So how about reducing the usage or changing the tarrif? Cutting back might seem hard but cutting out is even harder!

To refer again to the person I mentioned in last week’s blog we looked at her list she had £160 ($300) listed for cigarettes for four weeks. Now I’m going to sidestep the whole smoking vs not smoking topic right now however looking at it from a purely financial viewpoint this contrasted with this person’s food budget of £200 ($380) for the same period.

Now the food is a survival essential, smoking is less so – even for a long term smoker. She herself, on learning how much she was spending on cigarettes was shocked and said she would cut that back. And here’s the really key part – we were looking to bridge a £85 ($150) dollar gap between earnings and outgoings.

By reducing her budgets for non-survival, or optional items, we were able to do that. It won’t be easy but she should be able to hold out until her pay rise in a couple of months.

Doing this exercise has meant that rather than wrack up debt she lives a little more frugally for now and can enjoy the rewards of her efforts when her pay increase comes in.

Whatever your situation may I offer the thought that taking the time out to work out how to stem your outgoings is always a worthwhile investment.

Until next time;

Stephen

Stephen Hart

The Truth Will Set You Free

Money. It’s an interesting thing. Have you ever felt it has a life of it’s own? That it ebbs and flows seemingly of it’s own accord resulting in you thinking, “I’m sure I just got paid, where has it all gone?”

If you have felt like that or had those thoughts then let me assure you that you are not alone!

Just last week I was working with someone who was very stressed about a number of issues. One of those was their finances.

I asked if they had a set budget for the month and they assured me they had. Something in the way they said it made me question the validity of their statement and after a few more questions it emerged that they didn’t actually have a set monthly budget but rather, had more of an understanding of what bills they had to pay.

I offered the idea of putting together a fixed monthly spending plan where everything would be anticipated and accounted for. Their response was swift (and one I have heard before) – “Oh that sounds a bit scary!”

Yes it is scary but here’s the thing, the money will be leaving their account whether or not they write down where its going. At least if they know ahead of time that they are going to fall short they might be able to put a plan together to fix it.

When it comes to financial matters I really do believe that the truth will set you free.

So let’s say that you agree with me. How do you put together a spending plan?

Start with the necessary items, the things that you have to pay. Typically this will include the mortgage or rent, food, heating bills and water.

Next you would list everything else that you are currently paying form; and that bring us to the golden rule of financial management – write everything down.

Every payment you are going to make, every purchase you can anticipate, no matter how small – record all of them.

If the money is going to be spent, then record in advance what it is going to be spent on because, whilst it might be scary, it is better to know how close to the edge of financial ruin you are than to blindly step over it!

Most people get slowly deeper and deeper into debt because they weren’t willing to honestly look at their income and out goings. After all, I doubt you will know many people who maxed out their credit cards in one go, but I bet you do know many people who slowly charged more and more until the cards were at their limit.

So going back to our list what do we have on it?

Fixed expenses followed by optional ones.

Whatever the final figure, the truth is there – staring you in the face, in dollars, pounds or whatever you use for currency. That figure is the truth which you must accept if you are to improve your situation. This is truly the first step towards financial freedom.

My friends, the truth will set you free.

Until next time;

Stephen

Stephen Hart

This is the first post in a series on obtaining financial freedom – in the next issue I will explore methods for helping your income exceed your out goings!

Picture from wiktor1993 with thanks.