John Lowe of MoneyDoctors.ie, in the first of three parts, sets the scene in making the most out of your money.
Over 173 years ago, a certain Mr Wilkins Micawber from Charles Dickens' novel David Copperfield, quipped: "Annual income - £20, expenditure £19.19s.6p – result happiness. Annual income £20, expenditure £20.0s6p – result misery."
That great character 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.
Break it down
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 five years.
Presuming you have completed an annual household budget (email me for simple to use, easy to understand spread sheet with all the categories – even tots itself up) 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. It also includes alcohol, tobacco, birthdays, anniversaries, christenings and bereavements.
Savings would include the provision of a Rainy Day Fund - remember, the ideal is to have three to six months net 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.
Map it out
Your spending should be mapped out on a monthly or weekly basis. Look at your fixed outgoings to see if there are cheaper alternatives.
Electricity, gas, 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, with energy costs literally gone through the roof, now is as good a time to review all your energy costs and compare for economies. Check and recheck your interest rates. It may well be worth your while switching your mortgage to a more competitive lender.
Albert Einstein stated that compounding is mankind’s greatest invention as it allows the reliable systematic accumulation of wealth – that is why the banks make so much profit.
Now have a look at your net monthly income and see how it matches up to your outgoings. You can now plan with the surplus funds – greater contributions into your pension, saving for your children’s 3rd level costs or the balloon payment on your car’s Personal Contract Plan in three years’ time.
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 bi-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.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.