If you are dreading opening letters because there could be a bill in it, then you could do with tackling the following little exercise. That feeling of dread is a warning to you that your finances are not in a healthy state. It’s a clue that you, possibly only subconsciously, know that you have or are heading towards a problem with regards to your financial well-being.

Most often, we instinctively hide our head in he sand, and pretend the problem will go away. After all we will be receiving a salary increase, or will be inheriting some money, or applying for a better paying job. These anticipated events in our life will pay for all of this debt. Regrettably, this doesn’t usually happen. We tend to increase our spending when the income increases, and we do this without another glance at the debt burden accumulating quietly in the shadows.

If you have taken your head out of the sand, and have accepted that you might have a problem and are prepared to work on it, then this little exercise that follows should be your very first step. You need to establish exactly what is going on in your finances. Without a full evaluation of your financial situation, you will not be able to prepare a plan of action. Even if you have your head in the sand, you can still do this exercise!

What you need to do, as your very first step, is to work out the exact amount that represents the money available to you after all your expenses have been met every month as well as setting aside a small amount for emergencies.

Do this quick exercise for yourself. Draw two columns to the right hand side of a sheet of paper. In the far column fill in your earnings after your mandatory tax and national/unemployment insurance deductions. In the column to the left fill in, one by one, the regular expenses you are committed to paying. This will include such items as rent, electricity, water, heating, local tax, your monthly travel costs whether by public or private transport, an amount for your monthly household requirements such as food, cleaning materials and cosmetics, telephone and internet access etc. Do not leave out anything.

The next items you enter will be to provide for items you only pay out once or twice a year. These would include your holidays for instance. Work out a monthly average to what you spend on your holidays. For instance if you went to Spain in August and Egypt in January, add the two costs together and divide by 12 to provide yourself with an amount that you should save towards your holidays every month. Now add an amount for your entertainment expenses such as going to the pub, your football match, renting a DVD etc. It’s starting to mount up. At this stage, if the column on the left that is your expenses adds up to a higher sum than the amount in the right hand column, you already have a problem. Here’s a very basic example.

Example

Item Expense Income
Salary after tax and ins. Deductions £2,400.00

Rent—£850.00
Electricity—£40.00
Water—£25.00
Heating—£40.00
Local tax—£80.00
Transport to work—£350.00
Fixed line tel. & internet—£50.00
Mobile phone—£45.00
Household costs: groceries—£400.00
Clothing: work and leisure—£100.00
Entertainment: movies etc—£100.00
Provision for annual holidays—£80.00
Emergency fund—£150.00
Left over amount—£90.00
In this example, you have £90.00 left over at the end of the month. Should you still be paying a student loan, it would mean that you are close to breaking even. What is not included are your repayments on borrowings. These are the amounts you have to pay every month on the balance outstanding on credit cards, car repayments and in store buying cards for instance. Tackling these amounts is step two. The first step is to work out where your money is going on regular expenses.

The above calculations indicate that you would have, for instance, £1200.00 per year available to shop for clothing. It also means that you could spend £960.00 per year on going on holiday. Remember that the £960.00 needs to cover travel, accommodation as well as other bits such as souvenirs and entertainment while on holiday. When we calculate our budgets, we tend to be really inefficient and forget about the extra little things we spend money on, such as a bunch of flowers for the girl/boyfriend or a wedding present for a friend.

The above is a really simple way of calculating disposable income. You might think this is really too simple to bother with. You think that budgets should be dreadfully complicated and only within the realms of an accountant. Do it anyway. It will be an eye opener.

Coming to terms with your negative financial situation usually requires you to face the fact that you are spending more than your income every month. It usually means that you are using a credit card or some other line of credit such as a bank overdraft, to cover the amount that you are overspending. By virtue of the fact that the bank is allowing you to pay the minimum instalment, off your debt, allows you to think that your income is actually covering your expenses. It usually isn’t the case. Over a period of time you will suddenly be faced with a huge credit card debt, and you will have no idea how that happened. Working out how much you have left over to service the debt with, is part of this first exercise.

The final effort, while making this first step towards balancing your monthly income and expenses is to keep a record of what extra items you are spending your money on. Keep every little till slip, note down every penny you spend and even those you give away in the charity box at the till. This is a really tedious exercise. You will be surprised at what we all, myself included, flitter our money away on. Addressing bad money habits, has to start at grass roots level.