Sorting out your finances can feel a bit like trying to get the garden ready for summer. You know it needs done. You even know you’ll be glad you did it once it is done. And yet, the perceived size of the job puts you off getting started and the lack of real urgency to the situation provides a constant excuse to leave it for another day…
All well and good. Until the only two good weeks of Scottish summertime weather arrives completely unannounced and you want to have people round for a BBQ which means quickly shifting into full on panic mode while you attempt to cut the grass, weed the patio, throw out “the rusty stuff”, wash the windows, clean the BBQ grill, paint the fence, hide everything that will fit in the shed, trim the hedge and buy some chairs that aren’t (yet) broken. On the morning before people arrive.
Or, from a financial perspective, until you realise you want to retire soon (like, really soon…) and you’re not even sure how many open bank accounts you actually have, let alone whether you’ve saved up enough to be able to stop working for ever.
Do future you a favour. Grab the nettle. Take the plunge. Carpe diem. One evening this week, turn the telly off, go get yourself; a cup of tea or coffee, your phone, a pad of paper & pen and/or your laptop/tablet. Congratulations, you’re now ready to get organised and take control of your finances, long before the neighbours turn up at the door with a tray of sausages and a pack of six morning rolls.
Anyone looking to get on top of their money situation should start by setting out the bare facts of all their finances. If this sounds like your worst nightmare then fear not - this can actually be a really cathartic and positive process. It’s like creating a financial inventory so you know where everything is, and what’s missing.
It breaks down into four manageable chunks, or lists really, in this case.
- The first list should include all your financial assets e.g. bank accounts, pensions, ISAs, shares, properties.
- The second should list all your liabilities e.g. credit cards, car finance, mortgages, loans.
- Next, list all your household income. Everything that comes into the bank on a weekly, monthly, yearly basis.
- And your fourth and final list needs to detail all your expenditure.
In short, you want to grow the first list, eliminate the second list, increase the third list and minimise the fourth list. Easy peasy…
You’ll hate the fourth list the most. Everyone does. Facing up to exactly what we’re spending all our money on is very rarely a pleasant experience. What it is, though, is an essential one. For two reasons.
- If you don’t know what you’re actually spending every month, how do you expect to work out if you could be doing things any differently?
- If you don’t know how much you need to meet your living and lifestyle costs, how are you ever going to know if you’ve saved “enough” to pay for all that?!
Try separating your expenditure out into ‘essential’ (direct debits, standing orders and things like food and clothing that you literally couldn’t live without); ‘discretionary’ (e.g. eating out, hobbies, subscription services, more new garden chairs…) and lastly ‘luxury’ (things you like to have, like holidays, but could (technically…) live without).
And, please, be honest with yourself. They only person you’ll be kidding here is you. And future you will be both disappointed, and, justifiably, a little bit angry. So just lay it all out as it really is, warts and all. Your sub-conscious won’t allow you to really invest in any plans you make if it knows they’re built on a foundation of half-truths and “forgotten” details.
Hopefully you’ll get a pleasant surprise and find that you have a surplus between your income and expenditure already. If so, great! You now have some decisions to make about how to use that surplus to best effect.
But even if not, this process could still help find steps forward. For example, it might wake you up to some discretionary or luxury spending you could actually live without, potentially freeing up money. Or it could make you think about ways to pay off any non-mortgage debts you might have first, so that whatever you’re spending on that right now could be redirected elsewhere in the future.
Assuming for a moment that you’ve got some spare case to invest each month, then one of the possible next steps you might want to consider is making the most of your annual tax-free ISA allowance. Even if you have just a small amount of surplus income, it’s possible to build a substantial nest egg over time by investing ‘little and often’. And if you’re a higher earner, you could also consider increasing your pension contributions, especially with the new higher rate Scottish income tax bands that recently came into effect.
A lot of these decisions depend on your plans for your money and future. Your focus might be on investing for retirement, or you may want to have flexibility and access to your investments before then.
Whatever route you do or don’t decide to take, if you can get a clear picture of your finances then you’re probably way ahead of most people in terms of being organised with your money. And with this comes the potential for greater peace of mind and opportunities for the future.
If you want to discuss ways to invest your money and plan for your financial future, get in touch with one of the Financial Planners at Aberdein Considine Wealth today.
