Personal Money Management 101

Take Control - Budgeting

A significant proportion of households these days owe more in debt than they own in assets. This is a problem rapidly becoming a crisis. But all that is needed to avoid joining this unfortunate group is a little self-discipline and the realization that spending foregone today will yield significantly more spending potential in future on an ongoing basis.

The aim of financial planning is to take you further along a pathway of building assets that will either grow in value, or produce a regular and growing income, or both.

The first steps along this path come from taking control of your day-to-day finances. Produce detailed inventories of both income and outgoings, and do this on a regular basis, no less than monthly, and prefereably weekly.

Once you have quantified income and expenditure you can take steps to maximize your available investment capital (and hence your future financial security).

"A penny saved is a penny earned" runs the old saying. And it is very true. If you can reduce expenditure, even if your income remains flat, you have increased your investment capital. Itemize your typical weekly expenditure. Look for ways to reduce the cost. Perhaps you can walk somewhere you usually drive or use the subway for? Maybe swapping a named brand for the supermarket's own? Or getting a take-out (or cooking yourself) instead of eating in a restaurant. How about reading the newspaper online? Having less beer or a beer-free day each week?

Carefully review your insurances. Loan protection plans are notorious for being mis-sold. If you have one, make sure that it would actually cover you in the event of losing your job - if you're a freelance/contract worker, it may not. If you really feel you need such cover be sure to shop around to get teh best deal (provided your lender permits this).

Another "scam" is extended warranty cover on electrical goods. Most such goods are covered by a legal warranty period of a year or so. In most cases if a fault develops it will do so within this timeframe. If it doesn't the product wil most likely go on working for many years. If you're paying extended warranty insurance, consider cancelling it and putting the funds in a high interest savings account instead. You'll soon have enogh to cover the cost of any necessary repairs, and if none arise you can spend the money how you please.

Check also for memberships and subscriptions that you're not using - and cancel them! It's easy to sign up for things you think are good, but neglect to cancel them should they prove less useful than imagined.

The best things in life are free; taking a walk, visiting a museum, re-joining the public library, spending more time with family/friends... Your circumstances are personal to you, but I'm sure we could all find some extra savings with only a little sacrifice.

However, don't go overboard in the pursuit of economy. Without a few pleasures life would be terribly dull. Allow yourself some expenditure on luxuries. This will make your other budgetary measures much more bearable.

Debt Management

Contrary to certain beliefs debt is an essential part of a developed economy. Few could afford the roof over their heads without mortgage debt, and the majority of successful businesses start life by borrowing. However, in many advanced societies, consumer debt is spiraling out of control. Much of this is fuelled by the easy availability of debt in the form of credit cards.

Stores are very good at tempting visitors into purchases they cannot afford, and the credit card further encourages the culture of “have now pay later”. The problem is that credit card interest rates are generally exorbitant, and many fall all too easily into an inescapable cycle of debt in which only minimum monthly payments are made. The balance, and hence the interest charges, soon mount up meaning – at best - the consumer pays well above the marked price for those “must have” goods. In the worst case scenario spendthrifts are forced to file for bankruptcy, often losing their homes, cars, livelihoods, families and prospects.

The key to debt management is discipline. If you’re thinking of incurring debt, can you justify the reason? If it’s to purchase a piece of real estate (as a home or investment), or to fund a business start-up or expansion, the answer is probably yes. If it’s to buy the latest car or other gadget that you’ve managed without until now but the marketers have convinced you that you simply “must have” the answer may well be no. Luxuries are not wrong, but far better to fund them on the proceeds of accumulated assets than to pay way over the asking price by buying on credit.

Credit cards are a great invention – used properly. I’ve had a credit card for years, and never paid a penny interest. I use it for convenience, and as a source of free short-term credit. But I make sure that credit remains free by settling my bills on time each month.

If you do have good reason to incur debt, make sure you are doing so in the most cost effective way. That’s rarely by credit card. Mortgage debt is secured on your home and is usually pretty cheap. Can you extend your mortgage? And if so, what is the rate? Personal loans can also be found at reasonable rates.

If you have credit card debt, try to reduce the interest being paid by moving the debt to a cheaper source. Perhaps extending your mortgage, or finding a cheaper personal loan. Some credit cards even offer interest free periods for new customers. If you can find one, take advantage. Remember, loyalty can keep you poor.

In comparing different forms of debt be sure to make your comparisons using the annual percentage rate (APR). Often the rates that appear in advertisements are manipulated to make them appear more favorable. The APR ensures that sources of credit are assessed on the same terms.

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