If someone had told me a few years ago that I’d be doling out personal financial planning advice, I wouldn’t have believed you. For as long as I can remember, I have been in debt. This is partly because I manage on a very tight budget. But also because, to me, financial planning is for those that actually have money. It’s not for people like me, who struggle to make ends meet every month.
“Annual income twenty pounds, annual expenditure nineteen six, result – happiness. Annual income twenty pounds, annual expenditure twenty pounds six, result – misery.” Mr. Micawber – David Copperfield
The thing is, that’s exactly the type of people personal financial planning is for.
A few years ago, I was in a dreadful state financially. I hadn’t paid certain companies for over 12 months, I was in debt with all my utilities and worse, I hadn’t spoken to anyone about it either.
Then the rent was affected and this shocked me into action. Losing the roof over my head was the catalyst I needed to take a good look at where I was going wrong. So what was my problem? I wasn’t doing anything about planning my personal finances. I had no idea what was coming in each month and what was going out. So, does this sound like you?
Do I need personal financial planning? Who can benefit from it?
- Are you constantly overspending and in debt at the end of each month?
- Are you in debt and want to manage your money a little better?
- Would you like a simple budgeting plan so that you don’t have to worry each month?
- Do you want to save some money for a holiday or Christmas?
- Do you struggle when you have a major bill to pay?
If you’ve answered yes to any of the above, or indeed, if you have a different reason for managing your money, you will find the 4 techniques below.
But the first two things you need to do when it comes to personal financial planning are:
- Calculate exactly how much income you have every month
- Work out exactly what goes out every month, leaving nothing out.
Once you know where you are moneywise, you’re ready to start.
4 techniques for personal financial planning
1. The budget for the year, not the month
This is especially good advice for people who struggle with major bills that come out of the blue. It’s also good for anyone who wants to save a little towards a holiday or a big spend towards the end of the year.
Many people budget for the month. They’ll include all the monthly bills such as mortgage/rent, gas, electricity, water, TV, telephone, food, etc. Although this is a perfectly acceptable way of budgeting, and better than nothing, when a big bill comes the way you’re not expecting it.
I cannot tell you the times this has happened to me. Particularly as I drive a fairly old car, prone to failing its MOT. The trick to being ready for these horrible big bills is to budget for them in advance within your monthly expenditure.
So, if like me, your car isn’t the latest model, it’s likely to need work during the year. By adding a tenner in your monthly budget for car maintenance at least part of the expense is covered.
Likewise, this way of putting a small amount away each month also works if you want to save for a big spend like a holiday.
2. Main account/spending account
This is how I manage my money. Clients pay me at various times of the month. This makes it really difficult to budget effectively. Nowadays I use one main account for all my clients. I have worked out what goes in and what comes out (with a little float in case of emergencies).
At the end of the month, I know exactly what is left over and that amount gets paid into another account. That other account is my spending account. I know what I have in that account is all I have to spend for the month. I use my main account to pay my bills after my salaries have gone in.
The main account is ‘untouchable’ for anything else apart from bills. Now from my spending account, I can budget for food, clothes and other ‘luxuries’!
Compare this spending pattern to a few years ago. I would have no idea what was left over after my bills had been paid (if there was money in the account to even pay them!) I’d also go food shopping not knowing how much I could spend. No wonder I was constantly in debt.
3. Piggy-banking Technique
This is almost the same as the main account/spending account budgeting method but much more automated. Consider that your bank account only gives you a glimpse of what is going on for that particular day. It doesn’t tell you about up and coming payments when debts are going out, and so on.
To get a better picture of what your bank is actually telling you, try the piggy-bank technique.
The idea is to have several accounts set up to pay your bills. These accounts are your ‘piggybanks’ and each month you ‘feed’ them with money from your main account.
Examples of bills accounts:
- Utilities (gas, electricity, water)
- Car (MOT, insurance, tax, repairs)
- Credit card bills/loans
- Spending money
Your bills accounts might be different so adjust accordingly. Once you’ve decided on your bill accounts you need to set up standing orders for each one. Work out how much money they will require and send over slightly more each month to avoid charges.
Schedule payments to leave your main account a couple of days after you get paid. You will only need to check your account a few times a month because it is all automated. It’s also much easier to see exactly how much you’ve got to spend.
4. Jam Jar Technique
The jam jar technique is a great way of personal financial planning if you get paid in cash on a weekly basis. As always, start off with a clear picture of what your bills are and how much money you have coming in. Then, using jam jars or other types of containers, write on the side what the bill is.
You can also write how much that bill is each month. Then set up several jam jars for different bills and expenses and once you get paid, fill up your jam jars. When the time comes to pay your bill, take the money from the allocated jar to pay it.
This is a clear and visual way of seeing exactly what money you’ve got and what you haven’t got.
Do you have any personal financial planning techniques? We’d love to hear them!