Spend Less Than You Earn - And Be Positive About It

Spend less than you earn – and start being positive about it.

Hello, and welcome to Making Finance Work

Sooner or later you will have to go through your budget; you know, work out the income, subtract the outcome and invest the difference. This is where a good number of people become unstuck.


Sticking to a budget can be difficult; something I have recommended for a long time is allowing a contingency, being realistic and understanding that some months you may have an unexpected tyre explosion/last minute holiday/forgotten anniversary that you have to contend with.


Personally I allow 15% for a contingency but you must use what you feel comfortable with as with some investments you may not be able to pull money out of immediately.


Contingency aside, a typical budget must, must, must contain every expenditure that you envisage over the month, year, week or day. As tedious as it may seem, if you discipline yourself, then over the long term you will reap the benefits. In as little as a year you will already be considerably wealthier than you are now.


Every body’s budget will be different of course, but typically will factor:

Mortgage/Rent payments
Car Finance payments
Utility Bills
Mobile Phone bills
Social Occasions/Entertainment

Of course it is beyond the scope of this article to include every crevice and crack that your monthly wage will slip down after you earn it, but the more precise and honest that you are with yourself, the greater the prospect of success for you in the long term. It may shock you to see how much you actually spend in one area. Your car, for example may cost you a monthly finance repayment. But beyond that there is petrol, MOT’s, road tax, tyres, tolls and congestion charges in some areas, insurance and even air fresheners, so budget for this.


As tedious and as boring as it is, a good budget will put you on the path to understanding your spending which will help you realise your financial goals.

If, once you have completed your budget and you realise that your outgoings are more than your incomings, you are in trouble. There is the chance that you may be borrowing more to try and keep your head above water. This is a serious predicament and you should look at getting immediate advice. The Citizen’s Advice Bureau may be able to help, or a debt specialist. Whatever you do, do not pay for any advice or debt restructuring plan. How can spending money help you get out of debt? Do not panic, you can sort this out as long as you take action. As difficult as it is, these things will not disappear. Mortgage and Council Tax payments are the most vital payments to make.


Once you have worked out your budget, the surplus should be used to pay off any debt that isn’t free, i.e. anything that incurs an interest rate. It is up to you if you if you include your mortgage in this, take a look at The Rule Of 72, work out how much extra payments on top of your mortgage will cut it short and decide for yourself.


Working out and calculating a budget may be tedious or even downright boring, but adhering to it and sticking to it can be relatively easy to do. The key to success is being as realistic as possible. If you like having a skinny latte on the way to work, the newspapers delivered or eat out every Tuesday then budget for it. For it are these things that we often don’t budget for, we sometimes seem to look at the larger bills and ignore the smaller purchases. Do not succumb to this.


In fact, you may look at your budget and decide that you do not like what you see; you may wish to remove the newspapers and eat out every other Tuesday. If you decide to do this then make sure the money goes towards reducing a debt or investment, but make sure that it doesn’t depress you or leave you with a feeling of sacrifice. There is differing opinion on whether saving a pound a day or so on a certain little pleasure will help you become richer quicker. Theoretically it probably will, but at what cost? If you are demotivated or depressed at having to live too frugally then this will affect your ability to be positive when working towards your financial goals, but as ever, it is totally up to you.


After a couple of months you will start to see a difference in the way you handle your finances and this is an important step that will become second nature. Understanding your relationship with money and your spending habits allows you to step back and add an element of professionalism and strategy to finance. Observe and control your debt reduction and investment and watch the debt dwindle and investment grow. As you do, get as excited as you wish, you are taking very real and very positive steps here to financial wealth and health.


Speak soon

Oliver Jones
Making Finance Work

The Eradication Of Debt

The Eradication of Debt

Hi There,

Before we start - let us remember the rules

Let us say that you have a credit card. Incidentally, the chances are that you do and In America alone there are 1.5bn scattered around. If all these cards were added on top of each other you would have 70 miles of plastic. That is roughly the same height at 12 Mount Everest’s’!


But we digress already.


Let us also say that the balance on your card is £1000 in debit, which basically means that you owe the lender this amount of money. Let us then assume that the interest rate is 15%Apr (in reality it will be more like 12-16%). If you did not pay a penny off the amount in that year, you would owe £1150.


Are you with me so far? Very good.


So, you haven’t paid off your card; but you have decided to start saving some cash. You are concerned that retirement may not be as far away as you think and so you leg it to your local building society to see what is on offer. Against all odds you find a super, super saver rate with an outstanding interest rate of 10%! Well done.


You put the £1000 in and sit back.


12 months later you review your building society account. Your savings have accumulated an extra £100 – for free! An extra £8.33 per month has been saved on top of your original £1000. You decide to leave it there for 10 years and vow never to touch a penny.


Ten years pass and you return to the building society. You now have £2,593 in your bank account. While you are there you decide to add £10 a month to the account and leave for another 10 years.
Those 10 years have passed, and you return. Sitting in your account is £8,829.31p. Not bad for doing nothing. After all, you will be 20 years older, regardless of whether you put that money away or not. You could have bought a car for £1000. Would it be worth eight grand? Probably not comrade.


Oh dear.
You forgot something.


You moved house and whoops a daisy kind of accidentally on purpose forgot all about your credit card! At a rate of 15% per year you now owe them £16,366.54p.

This is also known as compound interest, or the rule of 72. The rule of 72 allows you a good estimate of how many years it will take a lump sum to double at a rate of interest. Simply:

Divide 72 by the rate of interest and you have approximately the number of years of doubling the investment.

72 / X% = years to double. If you (like me) are not mathematically competent in any shape or form then there is a handy calculator here.

Saving and investing is a must. But you must pay off any debt that has interest on it. Instead of putting anything into a savings account, it should be put to your debts first.

All extra money should go to paying off:
1. Car payments
2. Mortgages
3. Credit cards
4. Store Finance
5. Anything else that accumulates interest.

It is a simple case of using maths. You know that on one account you can gain interest, much like on your savings account. And on the other you know that the things you want, but not necessarily need are financed, costing you interest.

There is a reason why savings accounts are typically less interest accumulators than credit finance. So the lenders can make a profit!

So in summary:

1.Pay off debts. Debts that do not accumulate interest are not as important.

2. Start to invest.

3. Add regular contributions to your investment. Notice how the 20 year account illustrated above accumulated £8,829.31p after 10 years of £10 per month added? If that £10 had been added monthly from day one there would be a whopping £14, 287 in that account.

4. The better the interest amount, the more cash at the end.

£1000 initial investment, with £100 going into the savings a month, with an interest rate of 12% will give you £106,484.78p That is 5 numbers and the bonus ball guaranteed for you in 20 years.
Next time we will be looking at how to get those returns.


Speak soon,

Oliver Jones
Making Finance Work