If you’re going to take charge of your finances, you have to know how much money is coming in each month and how much money is going out. You can’t make any changes if you don’t know what you’re dealing with.
Use a spreadsheet, a phone app, or pen and paper and make a list of all the money you have coming in to your household and all the money that goes out.
For your income, you should include:
- Wages from your primary job.
- Regular overtime and bonuses.
- Any secondary income you make (selling products on Etsy, dog-walking, baby-sitting)
- Any benefits you might receive (child support, child tax credits, income support, personal independence payments).
- Any pension or investment income.
For your outgoings, you should include things like:
- Mortgage payments.
- Utility bills.
- Mobile phone plans.
- Loan, credit card, store card and mail order payments.
- Grocery shopping.
- Nights out (cinema, the pub, bowling, restaurant meals).
- Child care costs.
- Fuel for your vehicle.
- Insurance (car, home, life, device, pet).
- Entertainment packages (Netflix, Amazon Prime, Sky, Now TV, Apple TV, Spotify, Deezer).
- Other subscriptions (magazines, anti-virus packages, repair plans for your household items).
- Gym memberships or club fees.
The list above is just to give you an idea – your budget will be different from someone else’s. The most important thing is to list everything.
It might be tempting to just “guesstimate” how much is coming out, but you’ll get more accurate figures and a better idea of what you’re spending each month by checking your actual bills and bank statements. Checking your bank statements will help you keep track of any regular contactless payments, too – these little purchases, like buying a coffee on the way to work every day, can add up to a lot at the end of the month.
Once you’ve listed everything, it’s time to do some maths:
- First, add up all your income.
- Next, add up all your outgoings.
- Then, take away your outgoings from your income. The figure you get is what’s known as your disposable income – the amount of money you have left over at the end of each month, after paying for all of your regular outgoings.
Now, the term disposable income is a bit of a strange one – no income is disposable. If we do have anything left over at the end of the month, it gets used – on unforeseen expenses, emergencies, or put aside for a rainy day.
Hopefully, after your calculations, you’ll look at the amount you have left over each month, and be in a reasonably comfortable position. You’ll look at it and think to yourself, “That’s about right.”
But what if you don’t?
What if that figure doesn’t make sense? What if your calculations don’t match the reality? What if, when it comes to the end of the month, your bank balance is telling you you’ve got a lot less than your budget says?
There could be one of two reasons for this…
You might have simply miscalculated your budget. You might have overestimated your income (it sometimes happens if you do a lot of overtime, or your wages are made up of different rates for nights or weekends). You might have underestimated your outgoings and missed out a few payments or regular purchases.
Or, your budget is accurate and your disposable income is correct, but it’s being eaten up by your overdraft.
How can that happen? Let’s use this simple example to explain…
Let’s say you have income of £1500 per month. Your outgoings are £1000 each month.
£1500 (income) minus £1000 (outgoings) equals £500 (disposable income). By this calculation, you should have £500 left over in your bank account at the end of the month.
But now, let’s say you have an overdraft of £400, which you are using to its limit.
Think of the overdraft as the bank’s money. Every pound you spend in your overdraft is a pound that will be deducted from your bank balance.
So, if you’re £400 into your overdraft, you’ve basically got a negative balance. When your income (£1500) arrives in your bank account, £400 of that goes towards paying off the overdraft first, leaving you with a balance of £1100:
- £400 overdraft equals a negative balance of -£400.
- -£400 plus £1500 equals a balance of £1100.
Now take away the monthly outgoings (£1000) and in reality, you’re left with a bank balance of £100 at the end of the month.
Now, that’s a simple example that assumes everything stays the same each month (we understand that reality is a little different from that), but hopefully you can now see how being in your overdraft can make it feel like you have less money than you have.
Because it’s part of your bank account, it’s easy to forget that an overdraft is another line of credit – another debt that can be difficult to get out of, and one that you might want to get rid of if you want a completely fresh start.
But what if you’ve got more coming out than you have coming in and you don’t have any disposable income at the end of the month?
It’s a scary place to be and it can feel like there’s no way out. Each pay day can bring some relief – but it’s only temporary, and as your outgoings leave your bank account, you soon find yourself back where you started, with no money and possibly having to rely on credit to pay for essential items.
Let’s look at a few things you can do…
2. Make some cutbacks.
If you do find that you’ve got more going out than you have coming in, then the first thing to do is to see if you can make any cutbacks. We’re not suggesting that you give up doing all the things that you enjoy – but if you’re this position, then you need to accept that you have to make some sacrifices and you should start looking for things you could trim back.
Is there an entertainment package you can get rid of? Do you need Amazon, Now TV, Apple TV and Netflix? Did you only sign up to watch that new, must-see show that everyone at work was talking about – and now that it’s finished, there’s not much else that takes your fancy? If that’s the case, then remember that many of these subscriptions are on a month-by-month basis, so you can cancel at any time and re-activate it again when that show comes back for another season.
Could you have one less takeaway each week and replace it with a homecooked meal? Could you take packed lunches in to work and chip in to a tea and coffee fund, rather than buy expensive sandwiches and hot drinks? Planning out the week’s meals and making a grocery list before you go shopping can help you stick to a food budget and avoid impulse buying.
The New Year is when lots of us start a new fitness regime – and that’s a good thing – but if you have a gym membership and you haven’t used it since last March, then consider if you need it at all. Perhaps the gym is just not for you – and there’s nothing wrong with that. Maybe there’s something else you’d rather do to keep fit (hiking, running, walking the dog, or a playing sport). These activities can cost a lot less than a monthly gym membership – or in some cases, are absolutely free.
3. Look for better deals.
There are many things that you just can’t cut back on – gas, electric, water, the mortgage, insurance, a phone provider.
More importantly, these are things that you should make your priority to pay, in full, every month – missing things like utility and mortgage payments won’t just affect your credit score, but can have severe consequences: you could find County Court Judgements (CCJs) registered against you and missed mortgage payments could lead to your home being repossessed.
So whatever you do, make sure you pay those priority bills.
But that doesn’t stop you from looking for better deals.
Although some companies have started to reward customers for their loyalty by keeping costs down, in general, most of the best deals are for new customers, so you can make the most of this by switching providers for utilities, insurance and phone services.
If you have credit cards, then it’s worth looking to see if you can transfer the balance to a lower rate card. The new year is when credit card companies offer interest-free balance transfers, which can give you a bit more breathing space if you’re struggling to pay off your debts – just remember to maintain your payments and pay off the balance within the interest-free period.
One thing you should definitely be doing is reviewing your mortgage, especially if you’re coming to the end of your fixed term or introductory rate. Re-mortgaging on a regular basis will guarantee that you’re getting the best rates – and often paying the least amount per month.
4. Check your credit report.
While you’re looking for new deals, it’s worth checking your credit file. Lenders and credit providers look at your credit profile to decide whether or not to offer you certain products. Having a good credit score and a clean file can help you get the best deals and rates.
By checking your credit file, you can confirm that everything is as it should be, and spot any errors or signs of potential fraud or identity theft (such as items of credit or accounts you don’t recognise). If you do spot an error, you can report it to the credit reference agency and the company concerned and have it corrected or removed.
Checking your credit file will tell you how good your credit score is and let you know if you need to improve it. Some ways of improving your credit score include:
- Making your monthly payments on time and not missing any payments.
- Not using more than 50% of your available credit limit.
- Paying off your credit card bills in full every month.
- Avoiding defaults and County Court Judgements (CCJs).
- Paying your bills by direct debit – this will also make sure your payments are on time and don’t miss anything.
If you’re looking for a good credit report service, then take a look at CheckMyFile. They were the first UK company to give customers online access to their credit report and are the only UK credit report service to use data from the 4 main credit reference agencies (Equifax, Experian, TransUnion and Crediva). Sign up today for a free 30-day trial and access your credit report here.
5. Deal with any problem debt.
When you reviewed your budget, you might have found that you have some debts that are taking a big chunk out of the household income each month.
You might be making your payments, but finding it harder and harder to do so. You might have debts that you want to get rid of, so you can have a fresh start.
What debts should you pay off? That depends on a lot of different factors, such as the type of debt, the balance, the interest rate, the term remaining, and the monthly repayment.
You should certainly consider paying off any debt that has a negative impact on your credit file, such as a County Court Judgement. A CCJ can have serious consequences, as it can stay on your credit file for 6 years (unless you pay it off in full within a month) and lenders and credit providers will see this when they are deciding whether or not to give you a mortgage, loan or other credit.
That’s not to say that you can’t get credit if you have a CCJ – there are several specialist lenders out there who understand that not everyone has a spotless credit file, and who offer loans with competitive rates.
Paying off a CCJ will help to repair your credit file – if the CCJ is paid in full within one month, you can have it removed from your file. If it’s paid after one month, it will still show on your file for 6 years, but lenders will be able to see that you have paid, and that’s a good thing.
When it comes to paying off your debt, you have several options:
- Pay them off yourself. This will take some discipline – as well as enough disposable income to pay off the balances. Depending on how much you can afford to pay and how much you owe, this approach could take a while, so you should be prepared to chip away at the debt over a long period of time.
- Set up an arrangement with your creditors. If you’re struggling to make payments, then setting up an arrangement could help. This involves you contacting your creditors directly and arranging a payment plan, whereby they agree to accept reduced payments, or freeze interest and charges, while you pay off the debt more affordably. It can definitely make things easier, but it can take time, and being in an arrangement will show on your credit file.
- Enter a debt management plan. If you don’t want to contact your creditors yourself, or find the thought too overwhelming, then you can speak to a debt management company or charity such as StepChange, and they will negotiate a debt management plan on your behalf. This is similar to an arrangement, where you will pay a reduced amount towards your debts each month, and often, interest and charges are frozen. A debt management plan will also show on your credit file.
Any of the above approaches can work for you and they each have their own benefits and risks. The main issue though, is that they can take time – and in the case of arrangements and debt management plans, can show on your credit file and may have a negative effect.
If you’re a homeowner, want to get rid of your debts quickly and give yourself a fresh start for the new year, then it’s worth considering a debt consolidation loan.
A debt consolidation loan is secured against your property, and the proceeds of the loan go to your creditors to settle what you owe, leaving you with only the secured loan to pay back.
A debt consolidation loan does have its risks – as it’s secured against your property, your home might be at risk if you don’t keep up with the repayments.
However, because a secured loan is often at a lower interest rate than your existing debts, and can be taken over a longer term, the monthly repayments can be much more manageable, leaving you with more disposable income at the end of each month.
5. Take the next steps and take charge.
Now you’ve read this, we hope it’s given you some ideas about how to fix your finances in the 2022.
If you have any questions about anything you’ve read, don’t hesitate to contact us and one of our expert advisers will be happy to have a chat and answer all your questions.
Happy New Year and all the best for 2022!