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Financial planning is one of the greatest challenges you will face as an adult. Balancing your income with your outgoings, preparing for unexpected expenses and working out the right amount to save is a tough ask. And, it gets even harder when you don’t have a steady income.
While short term loans for bad credit can help you get from week to week, loans should always be viewed as a last resort. The reality is that while the loan can help you meet your financial responsibilities in the short term, the interest will rack up quickly, getting you into even more trouble if not managed smartly.
Financial success means different things to different people, as a rule, you should be able to cater for all your basic needs each month, have an emergency fund and a plan to save up for bigger things too. From here, you will be able to manage your finances to increase your savings and build an investment portfolio.
But let’s come back to that a bit later.
Here’s a way to budget that everyone can use.
Work Out Your Basic Requirements
Working out what your basic requirements are is essential for people with irregular incomes but is generally helpful for everyone. When you have an irregular income, it is vital that you know which payments you have to make and when to ensure that you have enough saved or earned to make the payments.
Start by listing your essential costs and the dates they are due each month:
- Mortgage or rent payments
- Utility bills
- Loan repayments
- Transport costs
You should also add in yearly costs such as how much tax you will need to pay (if you so a self-assessed tax return) and yearly insurance costs. To add these to your list, simply divide by 12 to see how much you need to put aside each month to cover the cost.
Notice that this list doesn’t include things like TV subscriptions or clothes. When push comes to shove, these things can be set aside for a month or two until you have a bit more disposable income to play with. Your basic requirements are the things fundamental to staying alive and well, anything else must come out of your disposable income.
Add up all your monthly costs, including the proportional yearly costs and see what the total is. This is the amount you need to make each month on average to cover your most basic lifestyle. If you are not currently making this amount, you must explore avenues for making extra cash as you will not be able to make ends meet otherwise. Taking on extra shifts or a side-hustle could be one method but do consider applying for benefits if you think you might qualify.
See Where You Could Reduce Costs
Now that you know what your basic needs are, you should see whether you may be able to reduce your costs.
Start with your energy bills. Changing supplier is a quick and easy way to save money and many suppliers offer discounts and offers if you are recommended by a friend. Whenever you take an offer like this, mark the end of the offer in your diary as a prompt to search again. By regularly checking up on your costs, you will avoid steadily rising expenses and have a better idea of what you can get for your money.
Another way to reduce costs is through more sensible grocery shopping. We are all guilty of impulse buying at the supermarket (the aisle ends are designed with impulse buying in mind) but the amount you spend on these products can be quite shocking. Planning your meals and taking a list to the supermarket with you is a surprisingly good way to keep your costs down. Another trick is to buy supermarket own-brand items and do taste tests. If you really can’t taste the difference, choose the cheaper product!
Reducing your costs is always most effective when you make lots of small savings. Don’t assume that because the saving is small, it isn’t worth doing – every saving adds up over time. Even saving a pound a week will leave you £52 better off by the end of the year and that’s not to be sniffed at!
Get Value for Money
The more you can reduce your basic costs, the easier it will be to meet your basic target each month and the more disposable income you will have. But reducing costs isn’t always the most important factor – you must also consider value for money.
The easiest way to understand the value for money is through the concept of cost per use. For example, you could buy a t-shirt for £10 that lasts 10 wears or you could buy a t-shirt for £30 that lasts 100 wears. The unit cost for the first t-shirt is £1 per wear but the second t-shirt comes in at 30p per wear, much better value for money. By buying the second t-shirt, you may be paying more upfront but you will be saving more in the long term as you would have to buy 10 £10 t-shirts to get the same number of wears.
Of course, there are other aspects to products that determine their value for money – for example, a certain material might be kinder to your skin or a particular top might suit you better. Becoming a good judge of what is value for money takes time and is entirely personal. However, always bear in mind how much disposable income you have and what proportion of that income you will be spending.
Set Some Saving Goals
One of the main issues that hold people back from making choices based on value for money is their inability to make a larger upfront payment in order to get the long term gains.
This is best explained by the Sam Vimes Theory of Socioeconomic Unfairness.
In short, Sam ends up paying for cheaper, low-quality boots that break regularly because this is what his monthly salary affords him though he knows he is spending more in the long term. Getting out of this cycle is a real challenge because saving for better boots takes longer than the cheap boots take to wear out.
However, this isn’t to say that you can’t try. You definitely should!
Setting savings goals is an essential part of financial planning. Even if you can only save a few pounds each month, the funds you have should gradually grow over time. If you are currently spending exactly the same as you earn, you must find a way to reduce your costs and/ or increase your earnings so that you can start putting money aside.
There are all kinds of different saving challenges around but the best way to save is to be as consistent as possible. If you earn a regular salary, automatically transferring a portion of your income to savings every payday is the easiest way to save. All you need to do is make sure that you are saving a reasonable amount – not too much and not too little. If you earn an irregular income, instead of choosing an amount, decide on a percentage, say 10%. Then, every time you earn something, however much or little it is put 10% into your savings. This way, you will save more in the months you when earn more so you can balance things out in the months where you earn less.
Allocating a part of your budget to savings will help you to build an emergency fund but will also help you to save up for other things too. Saving up for things that will provide better value for money is always going to be a good idea.
Achieving Financial Success
Financial success means different things to different people but with this model of budgeting, it is possible to reach a wide range of financial targets. For example, once you have built up your savings and have an emergency fund, you might like to try investing some of your money. And, as the Sam Vimes theory shows, the more you save, the easier it gets to continue to make good financial decisions.
Your budget is the best tool you have to make the most of your money and work on your finances. While it might be tempting to bury your head in the sand, the more you know about your financial situation, the more empowered you will be to make positive changes. Similarly, the more you read and research about financial management, the easier it will be to make smart decisions about your money.
No matter how much you earn or how regularly, sticking to a budget that is within your means is the best way to manage your finances. If you are new to budgeting, be warned, it can be difficult to get started. However, once you are into a good routine and you have broken any bad habits you might have, you will notice your stress about money lifting and find your quality of life is better as well.
This is a collaborative post*