The Great Escape: financial review

Financial planning and budgeting are words that have only recently entered my vocabulary. As a child no-one, parents and teachers alike, ever sat me down and taught me how to manage my finances. This meant that as I entered adulthood and started to earn money for myself that I really didn’t have a clue.

For years I “managed” my finances by taking money out from the ATM, whenever I needed it, until it ran out. This feast or famine approach worked, in a rudimentary kind of way, although it meant that I never saved a penny.

Then I discovered credit cards. I applied the same philosophy and ended up massively in debt. If I wanted it I bought it: credit cards made it easy.

A year ago I decided that enough was enough. Crippled by credit card debt I decided to free myself and ‘The Great Escape: a liberation strategy’ was born.

The first year

Having made the decision to clear my debts I developed a plan. The plan involved making set payments on each of the credit cards, not taking on any more debt, and living within my means.

At the start of the year Amy and I set a basic budget and agreed that any additional spending would have to be earned.

This worked: debt repayments were made and no further debt was taken on.

The result: reduced debt.

Some additional funds were raised through a de-cluttering exercise. The proceeds from selling those items helped keep us afloat and allowed me to purchase a new laptop.

The plan was working.

Life is constantly changing and the same can be said for our finances over the past year. By the end of 2011 I’d sold most of my excess clutter, so the additional income that this was generating started to dry up. Amy had secured a part-time job, so our income increased. We also decided that we’d like to live a little in 2012: go on some trips, engage with life a bit more (whilst still paying down the debts).

We therefore decided to review our finances to see exactly where we were.

Financial review

This is what we did (one afternoon, late in 2011) to establish our budget for the start of 2012. It’s not something that I enjoy doing, in fact it could be said that I’m quite resistant to this type of activity. It is essential though if you want to proactively manage your money.

Monthly expenses

The most important thing to do is to write down your monthly expenses, all of them. We put together a simple spreadsheet in order to do this.

Starting with the most important we worked our way through what we spend each month (old bank statements are really helpful here): loan/credit card repayments, rent, utilities, insurance etc.

Most of the items at the top of the list are what I would call ‘set expenses’ i.e. the rent is the rent. Once these had been itemised we moved on to areas where we had some flexibility and where we could set our own budget: food, personal expenses etc.

Having lived on a very tight budget for a year we decided to be a bit more generous with our food and personal budgets.

Going through this exercise also highlighted some unnecessary expenses: old insurances etc. These were quickly cancelled, which of course freed up some additional cash.

Once everything, and I mean everything, had been itemised we hit ‘sum’.

The big test: would the total be less than our income?

It was.

In fact the total came in at a little below my take-home pay for a month. This meant that we were in a good position. If it hadn’t then we would have gone back and altered some of the expenses, like our personal ones (where we’d been quite generous to start with).

This meant that Amy’s wages could be saved. We recently set up a savings account for this and will be depositing money in there on a regular basis.

The other thing we agreed was that we would always maintain a buffer in the checking account of £1,000.

With our new budget set, we printed it off and stuck it up in the kitchen (as a reminder).

Smiles all round.

Dealing with uncertainty

We also decided to perform this exercise on a quarterly basis. I think this is a healthy thing to do anyway but there are a couple of things coming up in March/April that make this essential for us.

Firstly, there is some re-organisation going on at Amy’s work so we don’t have any certainty over her job or hours. We should know by April, so to take the outcome of this into account we’ll need to review our position.

In addition my pension contributions are going to be increased from April which will mean a drop in take-home pay. Again, we’ll need to factor this in.

The good news is that there is wriggle room within our current budget so even in a worst case scenario we should be OK.

The long hard road

We will however maintain the debt repayments: each month a set amount off each card. Debt repayment is boring and monotonous and frustrating but 2011 has taught me that you just have to keep going. By the end of the year we should be in really good position.

I’m estimating now that it will be sometime in 2013 before they are all paid in full.

I can’t wait!

Afterword

I really don’t understand why they don’t teach kids about the perils of credit card debt and about how to budget in schools. I’ve had to learn the hard way.

But, I am learning.

Developing a simple budget is a really great way to keep a handle on your finances. It puts you back in control.

If you’ve never done one before: try it, it’s a real eye-opener.

I’d love to hear about your experiences of budgeting in the comments box below, and if you need any help developing your own budget then drop me a line, I’d be happy to help.