Four simple and effective rules of money management

For me January is a very confusing month.

On the one hand, it is the time of beginnings and excitement. This is when I focus on ‘big’ plans and often find myself reflecting on my life and building dreams of where I wish to be. This is my ‘month of the big picture’ planning: picturing where I wish to be, taking stock of where I am and working out how to get there.

On the other hand, it is usually a month of trivial financial concerns. My Dad used to say he wished there was a way to skip January because it is the most expensive month of the year.

So here is the problem: in January my financial focus constantly shifts between our audacious financial goals and whether I should buy more fruit today or wait till next week.

I find this irritating in the extreme. Buying apples is important, but this is not going to help us win the Game of Wealth. Keeping focused on the long term just about might!

So, I decided to try and keep my focus by limiting my ‘personal finance’ audit and January stock taking to four simple and easy to follow rules of money management.

Money Management Rule 1: Know your cash flow?

I am convinced that the one thing everyone who should do regularly is to ensure that they know what their cash flow is. Ultimately, the aim is to have a positive  – and positively increasing – cash flow. In other words, you should be earning more than you spend.

Working out your cash flow is easy: just look at these bank statements you have been ignoring for some time. At the bottom of the statement you’ll find boxes saying ‘paid in’ and ‘paid out’ and some numbers.

• If the number under ‘paid in’ is larger than the ‘paid out’ you have a positive cash flow; if this difference has been increasing you have a prosperity personal finance profile. Well done!
• If the number under ‘paid in’ is smaller than the one under ‘paid out’ you have a negative cash flow. Sorry to break it to you but you are getting in debt and you may hit financial crisis (if this hasn’t happened yet).

Once you know the base line, you can concentrate on two framework strategies to increase – or achieve – free cash flow: reduce spending and/or increase income.

Money Management Rule 2: Don’t overpay for things!

There are different ways to overspend one of which is to buy stuff you don’t need, want or use. This is not what I mean here.

I am talking about overspending on things you need, pay for regularly and can’t go without. Things like rent/mortgage, utilities, insurance, food and clothing.

Interestingly, many people pay far too much attention to overspending on the (relatively) small stuff on a household budget, like food and lattes. Yep, you may be overspending on those and of course you should pay attention.

But I have to tell you that the ‘latte factor’ is over-rated. Giving up your daily skinny latte may get you a new pair of jeans but it isn’t going to get you a new life-style.

I look at small expenditure, I admit. But the biggest gain of cash flow, we achieve by and looking for competitive deals every time insurance is up for renewal; changing our mortgage if and when we find a great deal; and utility bills.

Our gains lately are relatively small because we regularly make sure we don’t overpay for things. Four years ago, we managed to reduce our monthly spending by close to £2,000; the lion share was from changing our insurance and small part from cutting down my ‘five espressos per day’ habit. Then again, every little helps.

Overpaying is often over looked in the case of debt payments. If you have credit card debt make sure you don’t overpay for it by taking advantage of 0% interest offers.

Money Management Rule 3: Don’t pay for things you don’t use!

You know that internet marketing pros love it when people pay by direct debit. You know that gym owners really love you when you don’t go to the gym.

Do you know why? Because using the products and services or not, you keep paying for them.

Well, it is time for you to start loving yourself a bit more and one way to do that is to stop paying for things you no longer use. Check you direct debits and standing orders and cancel all outgoings for thing you no longer use.

You may be surprised by what you discover; the first time we did this exercise, we found that we were paying for things we stopped using years ago. Even now, there is always something that has managed to slip through the annual inventory.

Money Management Rule 4: Reduce your GKW budget line

GKW stands for ‘God knows what’ and is a legitimate budget line in any budget. This is the money that you can’t account for at the end of the month even if you budget like a boss.

Guess what? How large is your GKW is a great predictor of how good is your money management and how well you are doing in the Game of Wealth: the larger your GKW is the less likely it is you will win the game.

Have you taken stock of your finances yet? How do you do it?

photo credit: pshutterbug via photopin cc