I want to tackle the subject because it is quite important.
Bearing in mind where we’ve been through Covid and everybody is trying to manage themselves, finances. And that is income, expenses, and although it might sound obvious, it’s not always that obvious for people who haven’t got a system in place.
Just to remind you that when we look at our financial situation, we want to look at income and expenses.
We also look at assets and liabilities.
Think of it this way, every household has a certain amount of money coming into it assuming there’s money earning but also a set of expenses going out.
The easiest one is to look at what’s coming in, versus what’s going out.
A good way to do this is to create a simple spreadsheet, whereby the top of the spreadsheet has different rows, stating what levels of income you’ve got coming in. You put the title ii as income and then you look at the household and you ask yourself the question what money have I got coming in?
If you’re in a job and that’s the sole source of your income there would be one line that says career or job and then how much that is. If on the other hand, you have multiple sources of income i.e. you have property income you trade the stock market, you might have an Internet based business, you might be in network marketing, several things like that you may have a part-time job or part-time business.
Each one of those represents another line in your income sheet. In other words, you might have four different incomes, multiple sources of income and each one of those will have an amount attached to it and you add all that up and that gives you a total. The next one is more complicated and that is your expenses. For a lot of people, there’s a big pursuit of money. I get this a lot.
People say to me I want to get my cash flow going up by this much and I say, that’s great, why are you looking to achieve that? Because at the end of the month, I want to have a spare 300 a month, 500, 1,000. I want to get to a stage where I’m financially independent and secure and that makes sense.
You’ve got to think of it this way, if somebody wants to be financially free and they try and make an extra thousand pounds a month to get there, £500 a month to get there I often will look at somebody’s expenses and sometime they’re spending extra two, three, £400 a month that they shouldn’t be.
When we do the numbers what I found out is if they could compress their expenses down by three, £400 a month it means they need less to get to financial security, or it means they need less to have a surplus of three or 400 by cutting expenses by, say, £400 per month and you’re trying to get to financial freedom that means it could be one less property you need to buy to achieve that. If you have a bath and it has lots of holes in it you’re filling that bath up, then by plugging the holes you don’t need as much water to fill it up. If somebody is bleeding an additional three, £400 per month they don’t need to be and most people if you look at their expenses there are ways to reduce it. We can plug the bath up.
It takes less water now to fill it up or certainly doesn’t need as much flow. I need to make an extra £1,000 a month to be financially free and I say, what if we can plug your bath and reduce the expenses by 400?
Wow that means I need an extra 600 a month, that’s one less property for example. We need to look at both income and we need to look at the expenses and expenses can generally be split into a fixed and variable.
Fixed meaning standard outgoing expenses that happen every single month like a mortgage is pretty much fixed.
Variable, are the things you have control over, so you might go out for takeaways every now and again, that’s variable.
It might be that you go buy things from the shops every now and again variable. Your family shopping groceries variable because it will depend on what you’re eating that month but fixed costs like utility bills and various outgoings, like maybe your mobile phone provider has a standard tariff, you pay £43 per month that’s fixed.
What your objective now is having looked at your overall income coming in. We now need to look at your expenses and it’s no good to look at it for a week, two weeks.
From my experience and I’ve done this a lot over the years, you need to go back three months because over three months you can get a pretty clear average of what you’re really spending.
A month’s worth of spending occasionally can be sporadic and this is where we have to look at cash flow forecasting, which is another video for another time. For now, retrospectively the easiest thing to do is to go back over the last three months and have a look at your overall spending and you have to categorise it.
Try and group it like for example, eating out is one group, groceries another one. Household bills another one you break down your spending and try and reduce the miscellaneous to as small as possible.
You don’t want that to be a big part of your expenses. You should be able to place your spending in some very specific areas and if you do that properly, you should actually be able to start to then look at everything you spend, and really tighten it down. I am talking about personal spending here. If you said to me about things like credit cards and I am paying for my business, your business cannot come out of your household spending.
What I mean by that is, when you look at your financial situation please don’t muddy into the water here.
From my perspective, I don’t want to look at my household expenses and go I’ve got some money I’m paying every month for my business, that needs to be a completely separate bank account, because your business should be stand-alone.
This is your household, your personal life, your business if your personal life is feeding that that is not a business it’s a hobby now. If this is not standing on its own financially it’s a hobby that you’re supporting.
What is coming out of this pot here on a monthly basis? We are looking to increase our income and reduce our outgoings and if we can do that at the end of the month we’re financially better off. It makes us more stable, but it also gives an opportunity because if we’re left with some residual cash now we can start to be mindful of how we spend that.
Imagine at the end of the month you’re up by £1,000 a month that’s residual cash flow. At the end of the month having earned this much and spent this much, you’ve got an extra £1,000 a month that money can go to investment strategies, towards doing something more creative.
So income, expenses are a very important part of understanding money.
Have a go at this over the next couple of months.
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