One of the first pieces of advice you will be given when you seek financial advice from anyone will be 'make a budget'. Unfortunately in this country it is not standard practice for young people to leave school with an idea of how to run their own finances. Successful financial management is a skill that should be learned, and unfortunately for many people, when they get their first taste of financial freedom, they are also thrown in at the deep end, left to work out how to handle their finances by trial and error.
Student life in the UK usually involves loans for fees and living expenses, not to mention 'free' overdrafts and credit cards as banks try to attract new customers who will stay with them for life, which unfortunately means that most new arrivals to the world of full time employment already have numerous commitments to honour. This makes a large hole in a graduate's wage, and it can be easy to make mistakes that can delay access to the property ladder for years at a time.
With wages lower in relation to the cost of living than they have been in decades yet access to smaller amounts of credit still fairly easy considering the current economic climate, it's easy to see why new graduates can be tempted to keep borrowing money in order to keep their finances ticking over. Although this may not seem like such a serious state of affairs, this type of borrowing is a potential disaster. Much as cortisone injections initially allow a footballer to play harder and faster, fairly soon they have the adverse effect, causing their joints to seize up, spending more than you earn in this fashion gives rise to a 'debt spiral' effect. Like Dorothy transported to Oz by a giant tornado, hapless graduates may soon find themselves abruptly whisked away to a new and unpleasant world of debt-related anguish.
However, you don't have to have made financial mistakes to benefit from running a regular budget. Many people think calculating a budget involves adding up their regular outgoings and deducting them from their wage packet after tax, but this is just the tip of the iceberg. Most people plan their budget on a month-to-month basis, which seems logical, but this often fails to allow for infrequent or one-off payments, or setting aside of funds for contingency measures such as car repairs, and neither does it allow for expenditure on holidays or over the Christmas period. Using more sophisticated budgeting techniques will enable you to react quicker and more effectively to situations as they arise, as well as automatically working out when you can safely divert funds from one commitment elsewhere – for example, money saved on household expenses can often be diverted towards holiday pocket money for the duration of your trip.
The first step is to make sure that you keep all your receipts, wage slips, invoices, bank statements, train/bus tickets, utility/communications bills and so on in a safe place. You will need at least three months worth to be able to build a sufficiently accurate picture of how your finances work. If you are working out a family budget, make sure your spouse's income and outgoings are accounted for too.
Once you have created your budget and reviewed your expenditure, you should be well on the way to identifying where you can make cuts without adversely affecting the key areas of your life. Even in dire situations, making cuts doesn't necessarily mean having to stop all non-essential expenditure, but it can be highly advantageous to systematically ensure you are getting everything at the cheapest possible rate. Investigate swapping providers for various servers, and try to find items cheaper online before buying from the High Street. Consider switching phone tariffs. By trimming off some of the excess fat in your payments you will reap immediate benefits. Also, make sure to renegotiate any direct debits you may have to fall within a day or two of your regular pay day.
Opening several different bank accounts may seem confusing but in actual fact is a very good idea. It protects funds allocated from being accidentally or purposefully spent on other things, and allows money set aside for contingency plans or infrequent expenditure to benefit from higher interest rates.
One thing that often puts people off creating an in-depth budget plan for themselves is that they are daunted by the apparent complexity – after all, if you know nothing about accounting, a blank Excel sheet can be a very daunting prospect. Fortunately as Internet technology constantly evolves, there are an ever-increasing number of free online tools that help you create a sophisticated budget system with ease. This invaluable budget calculator over at moneysavingexpert.com, a popular consumer community, is considered one of the best.
If you find yourself in severe financial difficulty, this kind of budget system will get you back in the black much faster. For 'automation' of the repayment process many consumers these days turn to Personal Debt Management agents. Once viewed in rather a dim light, increasing demand for this type of service has led to the creation of more reputable firms who are fully compliant with Office of Fair Trading standards and conform to self-imposed industry codes of practice. These firms act as middlemen between client and creditor, removing margin for error in repayments whilst negotiating advantageous terms.
Creating a budget before you get into debt will help avoid having to resort to external firms handling your finances. If you are having difficulty justifying spending a day on working through all of these things, think about how much you might save, and divide it over the hours you spend. As hourly rates go, it's probably some of the best work you will do this year!
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