The credit crunch has been steadily chewing up folks at home, and they’ve been busily trying to crunch numbers and find ways to cut spending. The thing is, trying to cut back on spending when we’re already in a financial crisis can be a lot like trying to put out a fire when you’re living in the house that’s going up. We can get a little too focused on the fire and what’s burning, overlooking some otherwise obvious means of putting it out more quickly. That’s why we have fire drills. So that even when we’re panicked, we can still follow some steps that have been drilled into us and get out safely, letting the professionals sort the fire.
Unfortunately you can’t call the fire department in to put out any home fires with your finances, but you can follow your own financial fire drill and find ways to save more than £500 a year. All it takes is making sure you and your finances are prepared. Follow these four steps to get started.
1. Make sure you know your monthly expenses and categorise them properly.
Far too many of us just lump all of our monthly expenses into a big breadbasket, never considering that some things are far more important to our financial health than others. For starters, mortgage and rent payments are the single most important thing we pay for each month. Without a roof, there’s nowhere for us to sleep, and hard sleepers aren’t what most employers want filling the employment line. Of equal importance is our food, but in a pinch most of us could get a job in a restaurant or café where we’d at least get one or two meals a day. Then there’s keeping the lights on and the water running. While you could maybe go without the lights, taking a shower isn’t as easy to skip. After that you’ve got transportation to consider. Nothing else you have or do with money is as important. Even if you have a car payment, there’s enough public transport available that you could likely sell it and just take the tube. Those are your essential expenses, and in most cases, you can’t easily cut some of them and save money while you’re at it. They’re also an important part of a balanced budget, which everyone should have.
2. Prepare a fire list of the things you need to pay, and make sure you have six months of that money set aside.
Most of the time people talk about having three months of salary saved up each month, and while that’s good stuff, it’s not everything. Three months of salary that’s not managed is a lot like throwing water everywhere but on the financial fire your fighting. In that case, you’ll already lose a month figuring out what to do, and then just have two months saved up. Instead of that, take a hard look at what you need to spend money on, which we covered in step one. Then make sure you have six months of that money saved up. Then you can then make a needs list of the things you’d like to have, such as a cell phone, or the occasional binge purchase you might be making out of habit. If you want to save up six months of that too, then have at it. You’ll end up with more money to work with no matter how you look at things, and in a financial fire, you’ll want as much money on hand as you can possibly have.
3.Think about your minimum hire and what you’d earn.
Few of us like to think of it in terms of the worst-case scenario, but that’s what fire drills are all about. When Wall Street crashed in the States, do you know what many of those investment guys did when they ended up on the street? The ones who got back on their feet ended up taking shifts in the bars they used to frequent. For them, it was a case of working from nothing, or leveraging an asset in the form of loyalty they’d built up with a business, and asking for a part-time job. These guys were movers and shakers until things came crashing down, but they held on, and when things picked back up they were in the game again like nothing ever went wrong. That’s what you need to be prepared to do, and knowing how much you could realistically earn, doing that will help you plan out your finances over the months it may take you to get right again.
4. Make a list of the things you could sell in a pinch.
This is perhaps the most unpleasant part of this task, but it’s something you should seriously consider. Let’s say you have a lovely £700 iPhone 6, but you could get by on that old £50 Nokia you never recycled or donated. That’s at least £450 worth of phone you could quickly dispose of in a fire sale, and while that would be a nasty loss, you’d also be able to make a budget food shop for a family of three for about four months with that money. You’d miss your social chats and life conveniences the iPhone provides, but at the same time you wouldn’t go hungry. The same goes for that super sound system you have in your living room, or that massive new Samsung wall sized TV you splurged on with your last bonus. All of these are things you can do without when things go sideways, and if you’re quick, there will be no shortage of less prepared people willing to take these things off your hands. Also, when you’re shopping, you might consider saving a little money and buying something less expensive, which just builds your overall savings.
By following these steps, you’ll make sure your finances are tidy, and be prepared for even the worst sorts of financial downturns. You won’t need to rely as much on credit or credit cards, and you’ll be stable enough that you aren’t going to have any frightful shocks if things don’t work out the way you imagined they might. Obviously none of us wants to be in financial hot water, but by making sure we’re prepared if things go sideways, we can really turn things up a notch and come out of the worst with a smile and a laugh.
The best part is that by seriously considering how bad things could be, you’ll be that much more motivated to save a little extra. This will help protect you from the worst that could happen. You’ll build up a tidy nest egg or retirement along the way, which is just another piece of the financial puzzle you should be thinking about when managing money.
Founder Dinis Guarda
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