Financial well-being is an important element when it comes to leading a happy, balanced life. Yet many people struggle to stay on top of their finances/live within their means – even higher income earners.
Financial worries can cause huge amounts of stress and are one of the top reasons for divorce globally. On top of that: if you are a parent struggling to manage your finances your kids may struggle too… Let’s change that.
While managing your finances (and getting out of debt) can seem overwhelming, with an easy-to-follow guide and some discipline, it’s very doable (for most). Our article today will walk you through it step by step.
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How to take (and stay in) control of your finances?
Personal Finance 101: Visibility
The key to taking and staying in control of your finances is visibility: visibility of what comes in (your income) and what goes out (your expenses). It is not much more complicated than that.
Your income may include:
- Salaries and wages
- Spouse and child support payments
- Investment returns (in the form of interest and/or dividends)
- Rental income (if you rent out a property).
Disclaimer: While we share what we have learned working in the financial services industry for almost two decades and managing our own finances, this article does not constitute financial advice.
Expenses can be categorised in different ways, depending on who assesses them and for what purpose. We manage our day-to-day finances by grouping our expenses as follows (in alphabetical order):
- Accommodation and Utilities (including electricity, gas, water, mobile phone/internet)
- Bank fees and Government charges
- Gifts and Donations
- Groceries and Dining
- Health (including medical, dental, physio and other treatments)
- Hygiene (including haircuts, manicures/pedicures, and massages)
- Experiences (including hobbies, leisure and entertainment)
- Transport and Travel.
Create visibility: Your daily task
To gain (and maintain) visibility of your incomings and outgoings, capture all your income and expenses (no matter whether they are paid in cash, direct debit/credit or credit/debit card) in a way that suits you. It could be as simple as an Excel spreadsheet or an accounting application (including Sorted).
A good time to do that is at the end of each day. It only takes a few minutes, and you will remember what you spent your money on that day. For your cash spend, make sure you check the balance in your records against your actual cash. If it doesn’t match you may have forgotten a transaction.
Create visibility: Your monthly task
At the end of the month, set some time aside to get an understanding of
- how the sum of your expenses compares to your income; and
- how much you are spending in each expense category.
Compare your income and expenses
If your income is higher than your expenses, the good news: you are able to make that difference work for you, whether to
- build up your emergency funds
- save for that trip of a lifetime/deposit for your first home/your kids’ education, or
- invest and build up a passive income stream.
If your income is lower than your expenses (and this is not a one-off occasion), it’s likely no news to you: you live beyond your means and are not paying bills on time/are accumulating debt.
Understand your spending
No matter whether you belong to the former or the latter, review each expense category in detail to see what you’re spending your money on. I guarantee this will be eye-opening, especially when you do it the first time around.
Understanding where your money goes is crucial if you want to get out of debt. But even if you live comfortably within your means, it makes sense to review your expenses (at least every once in a while). Life circumstances change, and chances are you are not using your hard-earned money in a way that gives you the most value.
Adjust your spending
There are a ton of opportunities to reduce your spending… in each category. Don’t believe us? Check out our ways to cut your spending and start reigning in your household budget.
Pick the easiest (three to five) opportunities and stick with them for a few months. Then look at the list again and see whether there are other savings opportunities you can add.
If you cut your spending to pay off debt, you are likely to reach a point when it becomes harder. Whenever you reach that point, think about what is more important to you: getting out of debt (as quickly as possible) or doing whatever it is you find hard.
It is a very rewarding feeling when you see your debt diminish (and your investments accumulate) from month to month
Do you really have the right insurance coverage?
Having insurance can be a lifesaver (or a nuisance). Our step-by-step guide helps you find a policy that suits your needs.
Make a budget
Based on a few months of actual numbers, create a monthly budget for each expense category. Again, you can use a simple Excel spreadsheet or an accounting application, whatever works for you.
Ensure you also consider expenses that only occur (bi)annually or infrequently (for example, your car insurance or annual holiday).
Compare your budget with your actual spending (and adjust as needed)
Once you have set your budget, at each month-end from that point forward, check how your actual expenses compare to your budget:
- start with the total for each expense category,
- then drill down into the expense categories where you overspent (by heaps).
Determine what caused the overspending and act accordingly:
- Was it a one-off? – For example, an appliance broke down, and you had to get it fixed. Maybe you need to include a contingency for future repairs/replacements.
- Or is the cause of a more ongoing nature? – For example, your groceries bill has increased by $100 a month because everything has just gotten more expensive. You may want to review/adjust your category budget accordingly and potentially look for opportunities to cut your spending elsewhere.
How to manage/get out of debt (as quickly as possible)?
Growing up in East Germany, debt wasn’t an option: You had to pay someone cash to buy that second-hand TV/car/other luxury items.
In today’s day and age of instant gratification, avoiding debt (in the first place) may sound old-fashioned. And given today’s house prices, you may only be able to afford a place of your own with a mortgage. However, if you do (need to take on debt), at least do it informed.
Debt 101: Not all debt is created equal
Below is a list of common types of personal debt – in the order of interest charged (from highest to lowest):
These are small (generally for a few thousand dollars maximum), short-term loans (typically due on your next payday hence the name). The interest rate is usually charged as a fixed $ amount per $100, which can add up to multiple 100% of the actual loan amount if compared on an annual basis.
Hire purchases, Credit cards, Personal loans and Vehicle loans
In New Zealand, these loans attract up to 30% interest. Whether the loan is secured (for example by your car or an appliance you bought) or not doesn’t have a huge impact on the interest rate charged, given the commodity character of a vehicle, appliance etc.
These types of debt are secured by your home or an investment property and attract the lowest interest rates out of the bunch. Mortgages are offered with fixed or variable interest rates.
Before you get into (any) debt
Firstly and most importantly: AVOID IT IF YOU CAN. Don’t get into (more) debt if there are ways around it. For example, could you defer whatever you need the money for and save up for it (by cutting your spending or working two jobs for a period of time)?
If you can’t avoid debt, here are some key tips which apply no matter what type of debt you take on:
1. Find out what the current Central Bank Rate is in your country. This is the rate at which your bank can borrow money from your country’s Central Bank.
2. Shop around for the best deal based on your needs. Look for one with
- a low-interest rate (based on the type of debt)
- no or low (set-up and ongoing) fees and charges, and
- the opportunity to pay off faster without being penalised.
3. READ THE FINE PRINT – It may seem tedious, but it can save your butt.
Pending the type of debt, also consider the following:
Why these loans haven’t been banned yet is beyond me. They should be. Why? Charging interest rates of multiple 100% pa is predatory. Plain and simple. What does it mean for you? AVOID THEM LIKE THE PEST.
If your hire purchase comes with an interest-free period don’t just sit on it: Use that interest-free period to repay it all (in weekly instalments you can afford).
Vehicle and Personal loans
Car loan interest rates offered by finance companies attached to car dealers tend to be better than personal loan interest rates offered by banks. So, make sure you shop around.
Always pay your monthly credit card balance ON TIME and IN FULL! Put a reminder in your calendar to NEVER MISS THAT PAYMENT.
Banks charge immediately (including a late fee). And once forgotten, you have to pay back your total outstanding balance (not just the closing balance in your last statement) to stop being charged interest. Ouch!!!
Never accept the advertised rate. Negotiate!!! If you don’t want to talk to a myriad of financial institutions consider using a mortgage broker.
Financial institutions tend to offer a higher loan amount than is healthy for you, so before signing on the dotted line, consider whether you can still make the regular monthly repayments and pay for all your other expenses
- on a (temporarily) lower income/on one income only;
- if the interest rates went up (check what interest rates were historically to get an understanding of the interest rate volatility you could be exposed to); and
- if your other expenses went up.
Choose to pay weekly or fortnightly (instead of monthly) to reduce your interest payments and pay off your mortgage faster.
And use any savings you may have to offset your mortgage interest. You still have access to your emergency funds, but while you don’t need them, they will reduce your interest payments.
Make a debt repayment plan and pay off your debt (as quickly as possible)
I spoke about VISIBILITY being key to managing your finances at the beginning of this article, and this is particularly true for any debt. So, if you have debt and struggle to get a handle on it:
First of all, you must be honest with yourself and put all your cards (= debt) on the table. Use an online tool or Excel spreadsheet and list (all) your debt (including the interest rates you pay). It might be very sobering (even scary) what you see but at least you now know what you’re facing.
Follow the above money management tasks and be disciplined. With the money you can save every month, repay your debt:
- Contribute the highest repayment amount you can afford to the one that incurs the highest interest rate. If you’ve got two (or more) with a similar interest rate pay off the smallest debt first – it helps you get into the habit, and a quick tick on the board can be a great motivator
- Pay (at least) the minimum amount for all your other debt until the debt with the highest interest rate is paid off. Then move on to the debt charging the second-highest interest rate (and so on).
If the going gets tough (and there will be moments on your debt-repayment journey), imagine how relieved you’ll feel once all that debt is off your shoulders. The sacrifices you make now will be so worth it once you can say: I’m debt-free.
When balance transfers make sense
Do you have credit card debt and can’t seem to get a handle on it no matter how much you try to pay off every month? A balance transfer credit card with a 0% interest rate may be a way out.
However, only apply for a balance transfer credit card
- if you can pay off the credit card debt you transfer within the introductory period
- with the intent to close down your old credit card account/s (to avoid being charged annual fees and any other maintenance fees on your old card/s)
- if you do not use this new credit card to accumulate more debt; and
- once you’ve read the fine print and did the sums to see if it’s worth it.
Also, be aware that you’ll have to include the balance transfer request in your application. Once successful, upon activation of the new card, your debt will be moved over to your new card automatically. Don’t use the card to pay for purchases (some people suggest putting it at the back of your freezer or cutting it up) but start paying off the transfer balance immediately.
Boost your income
If cutting your spending is not enough to move the needle look at ways to boost your income too:
- When did you last ask for a pay rise? A while ago (or never)? Now is the time to stop being shy
- Could you work two jobs (for a period of time) – your normal one plus a side hustle in the evening or on weekends?
- Do you have a partner who doesn’t currently work but could (for example, if your kids are more independent)?
- Do your adult kids work but live rent-free under your roof? Maybe it’s time they chip in (or start living on their own)?
- Do you have a spare room in your home you could rent out short-term or long-term?
- Could you share your car with your neighbours?
By the same token, if you receive any extra income you didn’t expect (for example from your tax return, a bonus payment, a birthday present or inheritance) use this to pay off your debt (faster).
Paying off debt may take a few months, but depending on how much you have accumulated, it can take years. If you manage your finances as per the above daily/monthly tasks, are disciplined about your spending cuts and direct your savings to pay off your debt (as per above), you should see your debt (slowly) decrease.
If you find, despite all that, you just can’t get a handle on your debt, you may want to seek out more hands-on assistance. Many charities (for example, the Salvation Army) and some local government agencies not only have a food bank program (which would help you cut your spending on groceries if eligible) but also have (free) financial counsellors who can help you find a way out of your seemingly unsolvable situation.
How do you stay on top of your finances?
How have you managed to pay off your debt (and over what time frame)? Do you have any tips we can share with our readers?