managing money

Getting started with money

How to start taking control of your finances

For the past five years I’ve been writing content on personal finance, pension planning and investments. These aren’t topics that get people excited, unless you are part of the ever-growing FIRE community (FYI – Financially Independent Retire Early). But, the reality is that these topics, whilst boring, are important. And it’s not that we don’t know they are important, it’s just that we often don’t know where to start.

The steps below review the key principles of money management. There is no way to cover every element in detail, but this is enough importance to guide you through the key actions and reflections required. Like anything in life, it is a continuous process, and you might decide that it is easier to just get a professional to take care of it for you. The same way that I have someone do my cleaning. It just aint for me.

First steps

Before you can move forwards and get a handle on money you need to know where you stand. This means pulling out bank statements, credit cards, finance agreements and mortgages for your household. Then you need to allocate some proper time, and this means no Netflix on in the background and the kids in bed, to checking that you haven’t forgotten about some account you had as a student. I got burned by this, I was about £12 overdrawn as a student, forgot about the account, moved house and it wasn’t until I tried to open a new account with the same bank that I found out I owed nearly £500. The unauthorised overdraft fees kept mounting! Conversely, my husband did the same thing but had the pleasure of finding out he had £800 that he’d forgotten about.

We are human, we move house, we switch bank accounts and credit cards. It is worth doing a proper audit and getting an accurate lay of the land before you decide on anything.

Debt first

Consolidating and managing debt is probably your first port of call unless you’ve got your hands on some super cheap credit. Given that interest rates are historically low it is unlikely that your savings are generating much revenue. Debt however is pretty costly. So work out how you can systematically reduce it. The debt reduction motto should be “something is better than nothing”. Even if it feels insurmountable try and work out where else you can save to start chipping away at your debt.

Give yourself a cushion

Once you’ve got your debt under control you’ll want to protect yourself from any monetary shocks. The official term is ’emergency fund’, but you can think of it as ‘when the shit hits the fan’ fund also. Since COVID-19 there has been a significant amount of shit flung around and it’s unlikely that we’ve seen the end of it. Paying off debt gradually helps reduce your required monthly payments. This means you can start to put that money away in an instant access/current account. There are various amounts of guidance on how much you’d want this to be, but 3 months living expenses is a good place to start. This can remove stress should you lose your job or need to care for a dependant.

Why do you want more money?

Once you’ve covered the basics it is time for the hard questions. We, for a variety of reasons, have been led to believe that more is more. Money, up to a certain point, does increase happiness, then it just tapers off. You just don’t get more happiness for your savings and/or spending. Understanding your money motivation helps you make smart decisions later.

The good news is that there are no right answers. You don’t need to give a percentage of your salary to charity or to be securing your pension. All that is required of you is to know why this is your desired goal and to be confident that it is really what you want, and not something you’ve been following blindly. This sounds easy, but it isn’t. Knowing what we want, and what will make us happy is tough. Much harder than making more money or saving!

You might start with a list of things you want to do in 2022, or your professional ambitions. It might be taking time to reflect on the kind of legacy you want to leave your kids. David Sawyer in Reset (which I fully recommend reading) suggests ten questions to help you find your purpose:

  1. What matters to you?
  2. How much do you want it?
  3. If money were no object, what would you do?
  4. What is your family mission statement?
  5. If you only had a year to live, what would you do?
  6. What are three activities you want to be doing but aren’t?
  7. Where do you want to be in 5-years’ time?
  8. What did you dream of when you were young?
  9. What do you love doing?
  10. What are you envious of?

Money strategy

I think what I love most about money is that you can follow a process. There are incredible parallels between strategy and developing a financial plan.

Here are the core parts of a sound plan:

  • Situation: where are you now financially?
  • Objectives: what matters to you, and what do you want to achieve?
  • Strategy: How are you going to get there?
  • Tactics: What do you need to change in order to achieve your objectives?
  • Actions: Commit to changes, assign responsibility and set yourself milestones
  • Control: What does success look like? How will you measure it? How often will you ‘check-in’

Make your objective realistic! If you have debt and don’t have an emergency fund it’s unlikely that you will retire at 50 unless you are selling a company or have a huge salary. Your objective should be SMART and it should evolve with you. What made you happy 20 years ago is unlikely to be the case today, I for example no longer find joy in MD20/20 and Adidas poppers.

Eye on the prize

Most people have to give something up when they start to save. The key is to work out which things cost you the most money but give you the least joy. Takeaway coffee is the most cited example, but this has stopped for most people given lockdown. It might be banking the money today for those services you aren’t sure you’ll miss. Or perhaps its switching to second hand clothes which allows you to still shop and buy the brands you like, but make savings in the process. Or it could be committing to cook more to reduce your takeaway bill.

But, don’t strip everything out at once. The idea is to build for sustainable change. Resolutions fail because people expect to change everything in one month. Make a change you can live with. Taking control of your finances shouldn’t be equated with penny-pinching and sadness. It’s about working out what matters most to you and living a life you enjoy.

 

About Good Words Online

This blog was designed to be a home for all the content I’ve created over the years. It is a mix of book reviews, personal reflections and business learnings. There is no definitive way to live or work, we all make our own choices. I in no way think I am right about any particular subject. This is simply about sharing what I’ve learnt and creating an online reminder for myself.

The name, good words, has no religious references. We can’t be good all the time. Each of us will make mistakes. All we can do is try to learn from them and try and attempt to be a little better next time.

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