Do you open bank statements with a sense of dread? Or can you often guess the balance to within a few pounds? If you're thinking about taking financial advice, then prepare to know your spending habits like the back of your hand. Here's how...
What’s the most common problem to arise in a first meeting with a financial adviser? It’s not to do with pensions, mortgages or even savings. No, the issue affecting far too many people is this: they don’t know how much they spend.
Knowing what you spend is as vital as knowing your income. Really, it’s the same thing. If your spending is out of control (not necessarily too much, but simply unknown) then making financial plans becomes a great deal harder. One of the first things a financial adviser will ask about is your overall income, minus your habitual spending. Yet this last detail is often the hardest to come by.
The financial buzzword of the year has been JAMs – the ‘just about managing’ people. It usually means people on low incomes who struggle to make ends meet. However, many individuals with much higher earnings may confess to feeling like JAMs, overspending each month and failing to put away any savings. Financial planner Claire Walsh, Unbiased’s Head of Advice, has found this to be surprisingly common. ‘It can affect people in any income bracket. Even fairly wealthy clients may discover at our initial consultation that they have a poor grasp of how much they are spending from one month to the next.’
This head-in-the-sand approach is why so many people feel like JAMs – even if their salary or their large house would suggest otherwise. We want to live life to the fullest, so we try to stay just within our means. The problem is, we tend to misjudge what ‘within our means’ means. The result is a cycle of overspending followed by belt-tightening, which is never fun.
So how can we keep track of our spending? Few people have the patience to keep receipts or a spending diary (it can also really annoy your partner). Fortunately, there are effective short cuts.
Tracking your spending the easy way
- Let your credit card provider do it for you
Do as much of your spending as possible on a single credit card (partners can get a joint card), being sure to pay off the balance in full every month. Keep the bills, then calculate the average bill over the course of six months or a year. You’ll want to work out the median average as well as the mean (median is the figure right in the middle of the highest and lowest bill) as this can give you a better idea of a ‘typical’ month. It’s then easy to add in any extra spending you’ve done by cash, online transfer or cheque, by going over bank statements. You’ll end up with a fairly reliable figure of your monthly spend over a year.
Bonus points: Buying on a credit card also gives you protection on purchases between £100 and £30,000 – and if you can find a card with a good cashback deal then you’ll save more.
- Trend it like the FTSE
When the FTSE’s line graph trends upwards, we understand this as good news. You can do something similar with your current account. Every month, record the balance on the day before payday (grit your teeth if need be). Plot these figures on a graph and keep it somewhere conspicuous, like the fridge door. Then, every time you go to take out the milk, you’ll see whether your bank balance is trending up or down. There may be peaks and troughs, but the general direction should be clear. If it’s sloping downwards (or just holding level) then you may need to take remedial action.
- Feed the elephant regularly
One of the stranger habits people have is ignoring the elephant in the room. If a big expense comes along (such as a holiday or a new mattress) we tend to say, ‘That wasn’t a typical month – we won’t count that.’ In reality of course, these one-off major costs are the most significant things – and they won’t stop happening just because they’re sporadic. If you’ve budgeted for a steady spend of say, £3,000 a month, there simply won’t be the money available when they do happen. So look ahead several months, see what big purchases might be on the horizon, and divide those costs by 12 to get your monthly allowance for them. Quarterly bills and Christmas are perennial culprits here.
- Play ‘The Price is Right’
This trick is the flip-side to buying everything on one credit card. You put aside your cards and online shopping sites, and draw out enough cash on Monday to last the whole week. (If this sounds impractical, you can instead keep a spending diary for a week, and estimate on Monday how much you’ll spend in total.) See how close your actual spending comes to your initial estimate. You’ll then know whether you’re habitually too careful or too lax. Be sure to spend as normally as possible in that week – if you try to ‘be good’, the test won’t work.
- Take bank statements with a pinch of salt
You know the superstition of throwing salt over your shoulder? Some say it dates from when salt was used as currency, and the pinch of salt was meant to symbolise the amount you would lose in tax. Whether or not that story is true, it’s still a reminder that our money may not all belong to us. In particular if you’re freelance, run your own business or rely on an annual bonus to make ends meet, you may get a false sense of your income until your tax return falls due. So always take every pay slip and bank statement with a pinch of salt.
- Expect the unexpected
It only takes one burst pipe or faulty car engine to mess up your monthly spending plan. A third of middle-income earners have admitted they couldn’t afford an unexpected bill of just £500. Any good spending plan assumes that accidents will happen, sooner or later, and sets aside an emergency fund for them – regular savings accounts are good for this. Like feeding the elephant (see above) this spreads the cost of those one-off purchases to make them manageable.
If you find something in this list that works well for you, you can start to take a more rigorous approach to spending management. It’s not necessarily about spending less – you may actually find you can be more generous with yourself. The crucial thing is to have hard data that gives you confidence about the state of your finances. Another advantage is that by planning your spending more consciously, you can make the more expensive months (like Christmas and the summer holiday) less of a challenge, because they will be absorbed into your regular spend.
Last but not least, your adviser will thank you for bring such useful information to your first meeting – and the two of you will be able to use the time much more effectively.
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