I've always felt I've had a negative relationship with money and it's left me with years of little confidence and lots of concern about money. I've gone through most of my life with some form of debt hanging over me. Whenever money has got tight, I've often worried myself with such questions like "Do I have enough to survive? What if I lose my job and can't afford anything?"
This may seem normal questions to ask yourself, but after a while these types of questions can start to have a negative impact.
People say that money doesn't mean everything but it certainly helps you navigate through life. I'm not entirely sure when my confidence in my own personal finances really started but it's only been in the last few years. With that in mind, I'd like to share my reflections so far and what I feel has helped me.
The road to financial confidence can be a long one so don't expect this to be an overnight fix. It IS successful if you have a robust, clear system set out from the start. The overall key is to be honest with yourself, have a solid plan, and have a clear way of tracking your progress.
Take an inventory - assess your current position
It's important to assess you situation and know where you are at this moment. This helps to ground yourself and know where you're starting from. Be honest with yourself and take a full inventory of all your incomings and outgoings. Write out a list with all your monthly earnings at the top, then list out all your regular monthly outgoings underneath. Think of your balance sheet as a business and therefore a Profit & Loss statement. Be truthful and write everything down! When you're done, subtract your outgoings total from your earnings total and you will know at a high level whether you're making money or losing money.
Seeing this all laid out gives you an impression of your current net worth. Your net worth represents where you are financially and it is normal for this to fluctuate over time so don't be too disheartened to begin with.
Set clear, achievable goals
With the data supporting your from step 1, you now can do the fun bit! You'll want to have a think about both your short-term goals and long-term goals. Think about what you want to achieve from life and what you need to do with your finances to achieve them. These goals need to be realistic and achievable. Some common financial goals are:
- Paying off debt
- Building an emergency fund
- Saving for a holiday
- Buying a home
- Saving for retirement
Once these are split out in short and long term goals, you need to prioritise them. You then need to think about how much money each goal requires - this information will be used in conjunction from the data put together in step 1. By assessing how much funds a goal requires in comparison to your current regular monthly outgoings, you'll immediately see how much cutting on expenses you need to do.
Having an understanding of what it takes to achieve your financial goals will allow you to make better financial decisions.
Establish a strategy and build a budget
Here comes the toughest part of improving your personal finances and becoming financially confident, but it is the best way to be successful at it. You can make your budget as detailed & granular as you like but keep to the basic principle of "INCOME" and "EXPENSES".
There are many templates to follow and ways to build out your budget including the 50/30/20 framework (50% on essential costs like rent, 30% on other expenses or "nice to haves", and 20% towards savings). The one that I have been using for the last 18 months is "envelope budgeting" which has been the primary reason why I am now a lot more confident in my finances.
Edit: Blog post about envelope budgeting is in the pipeline!
You don't need any fancy software to get you going (although I highly recommend You Need A Budget (YNAB)), you can set up a basic budget in either Microsoft Excel or Google Sheets... or just get started with a pen and paper!
The first stage would be to look at reducing your outgoings (cheaper internet & TV package, less takeaway coffees, cheaper groceries, etc) - this is much easier and more immediate than being able to increase your earnings so start here first.
Build & maintain an emergency fund
Emergency funds act as a financial buffer that helps you keep afloat when a sudden need to have cash immediately occurs. An emergency fund ensures that you're able to have YOUR money for unexpected expenses without relying on credit cards or loans - even if you're in debt (hopefully with a plan to pay it off), an emergency fund protects you from having to borrow more.
So how much should you save? My personal opinion would be to save an initial £500 to start you off. This should cover any common emergency cash requirements (ie. new kitchen appliance, small car repair, etc). Ideally, your long term goal for an emergency fund would be approximately 3 months' worth of expenses. This gives you enough buffer should you find yourself out of work with a sudden salary cut for a couple of months, and any unexpected expenses already mentioned.
Whenever you dip into your emergency fund, be sure to top it up again when you're able to.
So you've managed to build up a healthy emergency fund (that you hopefully won't need to use - it's there for safety and peace of mind0, but where is the best place to store it?
The clue is in the name - it is an EMERGENCY fund so it's cash that you'd probably need quick access to. However, emergencies that require instant access to several weeks/months living expenses within the 2-4 days that premium bonds take to clear are so extraordinarily rare that often they simply aren't worth being concerned about.
What is important is that you have instant access to some funds. A blend of a months' worth in an instant access account, and the rest in premium bonds sounds like a fair balance. Like all financial planning, it is situation-dependent.
Build savings & investments
There's simply not enough time or space to write enough about how to tackle savings & investments, but it's worth considering when you're wanting to be more confident with your personal finance situation. Once you have got this far in your personal finances, you can now look further afield and seek opportunities and avenues for your money to work for you. I'm sure later in the year (and once I have improved my blogging skills!), I'll have a few posts about savings and investments and what I've learnt so far.
For me? I send any surplus funds I have at the end of the month (once all my "envelopes" are funded) straight to my Vanguard account. I currently invest in the Vanguard Global All Cap Index Fund which seems to be regularly suggested over at r/personalfinance on reddit.
I hope that you've enjoyed a little insight in how I've become better at juggling my personal finances and how I've found confidence. Note that this is my own thoughts and I am not a qualified financial consultant.
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