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fix your finances, save money – step one

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Are you ready? Get set, Go.

In the middle of the Olympics, I thought it would be a good idea to issue a personal finance challenge, one that I need to take myself. It’s in three parts:

  1. Establish how much you actually spend on stuff
  2. Look at ways of cutting costs
  3. Save and invest the extra money that you find

establish how much you actually spend on stuff

The most important thing about this step is to be honest. It doesn’t matter what you should have spent, or that you’re feeling pretty guilty about the beautiful shoes you bought a month ago and want to pretend that didn’t happen. No can do.

collect your bank statements and utility bills

To complete this step, you need records. Ideally you keep a diary for three months to see where your cash goes, but clearly that’s far too much effort for me. My shortcut way is to look at the most important bank and credit card statements. For me, that means 2 current accounts, and 2 credit cards. If you have any utility bills to hand, they are pretty helpful, especially if you have seasonal electricity use (e.g. higher heating bills in the winter).

make a list

Now make three lists of all your expenses, one for things (like bills?) that you would be willing to spend less on, one for things that you would like to spend about the same (like vacations?), and one for things you would like to spend more on (like charity?).

Group together in categories, but have a separate line for each of your recurring bills and Work out how much you spend on average on each in a month (total over the year, divided by 12). The following categories might be helpful:

things we would spend less on

  • Rent
  • Mortgage
  • Insurance
  • Gas
  • Water
  • Electricity
  • Phone and Internet
  • Debt Repayment
  • Any other categories that are appropriate to you

things that we might want to keep the same

  • Spending Money
  • Any other categories that are appropriate to you

things that we might want to increase

  • Investing
  • Saving
  • Charity
  • Any other categories that are appropriate to you

The majority of my bills are set up so that they are the same every month, so I can put those in my spreadsheet (paper also works well) by just looking at one set of statements. At this stage, I tend to lump all “spending money” together. This includes clothes, cash, groceries, but do whatever works best. I split out travel as a separate item because that’s helpful to me, but you might want to split out groceries, or some other item that you are willing to cut back on. The most important thing is to include the really irregular purchases, as these will make a hole in your budget and it’s often possible to save money on them.

These lists must all be based on what you’ve actually spent – not what you wish you’d spent. Now add it all up. With any luck the monthly total will be less than your monthly income. If your good on budgeting, it should be about the same.

plonkee’s part of the challenge

This is my list:

My grand total is £1672.

Don’t forget to keep these lists and your grand total safe for part 2.

Image of Men’s Team Pursuit Medal Ceremony by Martin Dougiamas

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8 comments for “fix your finances, save money – step one”

  1. Is that how much you make each month as well? That might be important for seeing if you got your category amounts right.

    Another way that I have found that helps me to track my expenses is just to record each expense on a spreadsheet around the time that I make it. It helps to have the file that you use around (or on Google Docs) to keep the time between purchase and logging short - otherwise I just do what you did and look back at my bank and credit card statements. And that way you can categorize your purchase right away instead of having to remember it a month later.

    Posted by Steward | August 19, 2008, 10:18 pm
  2. After tax I make £1688 from my regular job, so it’s about the same.

    I have some additional income from side projects like this that essentially goes into savings.

    Posted by plonkee | August 20, 2008, 8:13 am
  3. Funny, I’m actually doing something similar next week.
    So, am I right in thinking that you want to reduce your mortgage?

    Posted by deepali | August 20, 2008, 1:54 pm
  4. Yes. In an ideal world I’d reduce my mortgage payment by remortgaging to a lower interest rate. It’s probably not worth it at the moment, as there’s a penalty for remortgaging during the fixed rate period, but this time next year there won’t be, so it might be worth doing then.

    Posted by plonkee | August 20, 2008, 3:11 pm
  5. The snowball calculator is good I find, to show you which debts to pay off first before saving. I like the choice between what makes sense mathematically or psychologically! Everyones talking of shoring up, I know I’m trying to pay off any debt as fast as I can at the moment.

    Posted by Robert Brown | August 21, 2008, 10:38 pm

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