Someone once defined Economics – or Political Economy as it should more properly be called – as maximising the usage of scarce resources. Put simply, this mouthful means getting the best use of your money which in these recessionary times is certainly a scarce commodity.
John Lowe of Money Doctors in the first of 3 parts, sets the scene in making the most out of your money.
Over 170 years ago, a certain Mr. Wilkins Micawber quipped "Annual income - £20, expenditure £19.19s.6p – result happiness. Annual income £20, expenditure £20.0s6p – result misery." Charles Dicken's great character from David Copperfield was spot on all those years ago.
Whether you are a government, business, a family or an individual, the philosophy is the same. If expenditure exceeds income, you have two choices – earn more or cut costs.
For some, earning more is currently a bridge too far and cutting costs similar – pare til you can pare no more – so whatever your situation, even bankruptcy, you have to manage your way through it. The final choice is prioritisation – which is why over 300,000 people cancelled their health insurance over the last 5 years.
Presuming you have completed an annual household Budget ( email me for simple spreadsheet ) your expenditure can be broken into 3 categories, the ABC of expenditure :
A - Fixed Outgoings
B - Discretionary spending.
C - Savings.
Fixed Outgoings consist of such things as mortgage/rent, loan repayments, electricity, gas, telephone costs, transport, educational, childcare, food and essential clothing, insurances etc.
Discretionary spending covers all non-essentials such as entertainment, holidays, other sporting and leisure activities. Includes alcohol, tobacco, birthdays, anniversaries, christenings and bereavements.
Savings would include the provision of a Rainy Day Fund - remember the ideal is to have 3 to 6 months annual income in an accessible account - pension contributions, educational plans or other sums set aside to meet future expenditure for you, your partner and / or family.
Your spending should have mapped out on a monthly or weekly basis. Look at your fixed outgoings to see if there are cheaper alternatives.
Electricity, gas (Bord Gais Energy’s HiveHome.ie – save € 120 pa on your heating/hot water via your smartphone while Energia seem to Have the best dual price). Telephone/Broadband and cable television are items that should immediately come to mind but there could also be substantial savings to be achieved by shopping around for cheaper car and household insurances and reviewing your life and health insurances.
For example, interest rates both for loan and savings products constantly change and what might have been the highest rate for your savings last year could very well be the lowest this year. Check and recheck your interest rates.
Albert Einstein stated Compounding is mankind's greatest invention as it allows the reliable systematic accumulation of wealth – this affects both lending and savings rates.
Now have a look at your net monthly income and see how it matches up to your outgoings. Remember also that while you would normally reckon on budgeting on a monthly basis, some of your bills such as electricity or gas are payable 2 monthly or quarterly.
However, both of these utilities run budget plans which allow you to make monthly payments which are reviewed regularly based on metered usage. Better in your pocket – next week in part 2, we will look at discretionary spending and your mortgage options.