In recent posts i’ve discussed the benefits setting yourself a budget can bring as well as going into quite a bit of detail about how to set yourself a budget. Following on from these posts I’ve put together a list of some budgeting tips that may help you successfully set and manage your personal finance budget.
Budget with Your iPhone
Keeping track of all of your expenditure is not always as easy as it sounds. It is very easy to forget all of the purchases you have made throughout a day if your memory is anything like mine! To help me keep track of my expenditure I have recently started using a handy little app called iExpenseit on my iPhone that is perfect for tracking all of my expenditure.
After i have bought something I simply pull out my iPhone (which i virtually always have on me) and add the details into iExpenseit. As well as being able to categorize expenditure in several different ways, the best feature for me is being able to export the expense details into reports in csv/xls form that can be emailed to my pc. This means I don’t have to spend time punching them into my Excel budget sheet.
Consistency is King
As boring as it may be the main thing that will help you successfully manage your finances better through is to take a consistent approach. Trying to everything all at once will most likely end up with the same result as doing nothing at all – failure.
If time is short aim to set aside 10 or 15 minutes everyday to work on your budget. If you are struggling to trim your spending take it one small step at a time. Work on one thing at a time (such as making coffee at home instead of buying at starbucks, saving a few bucks a day) and make it habit before you move on to the next thing in your budget.
Plan for contingencies
Whenever you put together a budget you should always build in some sort of slack to help cover unforeseen events such as an unexpected car repair bill. The best way to do this is to budget a fixed amount each month to come out of your expenditure and put it into a savings account to keep it safe. I call this my ‘emergency fund’.
Be strict with yourself and don’ be tempted to dip into this pot and spend it. Remember this money is there to cover unexpected or unforeseen bills, not to blow on a new pair of shoes or a holiday!!
Don’t forget quarterly annual expenses
While we are talking about budgeting for contingencies do not forget that many of you households expenses will be only incurred quarterly or evenly annually. When you work out your monthly spend/budget you should apportion these expenses on a monthly basis. Doing so will mean you do not blow your monthly budget next month when the car insurance is up for renewal.
Don’t do it alone
I’ve read quite a few different books about motivation and motivational techniques. One piece of advice I have often heard repeated is to share your goals. The theory goes that if you tell other people about your goals and aims you are far more likely to stay motivated and less likely to quit or under achieve.
The reason this tends to work is that we like other people to be impressed by our efforts. After we have shared our plans we have an inbuilt fear of failure that arises from not wanting other people to think we have failed. SO go out there and tell a close friend or family member what you are doing with your personal finances.
You will often hear financial experts desperately telling anyone who will listen that one of the most effective ways to manage and control your finances is to set yourself a financial budget. In my last post I explained step by step how to make a budget. But why should we bother?
In this post I will set out some of the key reasons why setting a budget can (and hopefully will) help you shore up your personal finances and help you achieve your financial goals.
Lack of Wealth Is Caused By Ignorance
The above statement is not meant as derogatory to anyone who is not wealthy. The point I am making is that I believe one of the main reason most people either get into financial trouble (I am referring to debt problems here) or fail to be as rich as they could be is because they are simply unaware of the concepts of financial planning, investing and financial discipline.
I have heard many people say the reason they got into debt was because they simply lost track of their spending or they didn’t realize how much debt they had until it was too late or that ‘things simply spiralled out of control’. I firmly believe that most of these people could have avoided the stress and strains that excessive debt caused them by being more aware of their finance and planning their spending better. The most effective way to do this is by setting yourself a financial budget or spending plan.
Successful Businesses Do It
The aim of businesses (be they a small one man operation such as a plumber or a multinational corporation like Coca Cola) is to generate profit for their shareholders. Virtually all successful businesses do two things regularly, without which they would more than likely not be as profitable;
- Produce Annual reports – to explain and analyze their profits and expenses
- Set internal budgets – to control costs and help generate profit
Think about this for a minute. If it is common convention amongst business managers that these two measures are essential if the business is to stand a chance of generating profits and being successful, why do the vast majority of individuals not take a similar approach to their own personal finances?
Budgets Allow Financial Reliability and Predictability
Have you ever run out of money at the end of the month? Not sure if you can afford that holiday next year? I could go on but the point I am trying to make is that by doing a budget as part of your financial planning you can introduce some predictability to your finances. This means you can effectively plan for the future. This may be planning to move to a larger house in a couple of years time, it might mean planning a big night out next month or even an early retirement.
Makes you richer by putting your money to better use
Budgets can make you richer in two ways. Firstly one of the main benefits of setting a financial budget for yourself is that it helps your stop wasting your money. Budgets are great at trimming the fat from spending whether they are multi million pound corporation budgets or on a personal level they simply stop money being wasted.
If you budget well you’ll have an amount of money left at the end of each month which you would not otherwise of had. This makes you richer than you were before in the sense that your disposable income has increased, freeing money for you to spend on things you wouldn’t have been available to afford.
Makes you richer by allowing you to invest savings
OK so if you budget you can increase your disposable income as we have just discussed above. If you are even smarter you don’t spend [all] of that extra disposable income, but instead invest it.
By investing the extra/saved money you now have you can hopefully generate new income (assuming you invest it wisely – more on this later) and wealth that you previously didn’t have. This means that if you follow this approach your net wealth will increase over time, or in other words you will get richer.
One of the things I constantly find myself writing on this site is the huge financial benefits that can be obtained from writing a budget. While many people know how to to this already I thought it would be good to create a breakdown of how I go about the budgeting process for my own finances.
Below I have set out how I put together the budgets for my personal finances. While the below has worked extremely well for me it is worth remembering that different things work for different people so what works for me may not be right for you. Despite this I firmly believe that the most people could benefit greatly and save themselves a lot of money by following my approach outlined below.
1. Log all of your expenditure
OK so before you begin setting your budget you first of all need to understand where all of your money is going at the minute. By understanding in detail what you currently spend your money on you’ll be in a good position to make changes that will enable you to better achieve your financial goals.
There is an unlimited number of ways you could log your expenditure. Personally I make a note of every penny i spend throughout the day using my iPhone and a handy application called iExpensit however making a quick note in a small notebook would work equally well. At the end of every day I transfer all of the expenditure details into a Microsoft Excel spreadsheet. Every time i spend any money (even if only a pence on a chocolate bar) i log the following four pieces of information:
- Date
- Cost
- Description
- Payment Method
In addition I have a number of standing orders and direct debits that take money from my bank account to pay for items such as utility bills, car insurance etc. Every few days I check my bank statement online and add any expenditure to my log.
At the end of the month I have a complete list of each and every penny i have spent, how i spent it and what on. At the end of the month I move on to the next stage in my budgeting process: categorizing my expenses.
2. Categorize All Your Expenses
Staring at a great long list of expenses can be quite a daunting task. Doing so it can be very hard to quickly identify areas where you may be spending too much or can save money.
In order to make my expenditure list a bit more usable I categorize each piece of expenditure into the following categories:
- Rent/Mortgage
- Utility/Household Bills
- Groceries
- Eating Out
- Socializing
- Clothes Shopping
- Other Shopping
- Savings & Investments
- Travel/Transport
3. Analyze It
Now i have everything nicely categorized I do a quick bit of analysis. First up i create chart in Excel showing the amount of expenditure in each category over the month. At this point i have a direct visualization of my expenditure. Being able to ‘see’ where I spend my money allows me to immediately compare the proportions and types of spending I do.
Monthly Expenditure Chart
4. Identify Areas for Savings
Once you have created your spending graph outlined above you may well have identified a couple of categories of expenditure where you know you are spending to much. Even if you have you should analyse all of the categories to if there are any easy savings to be made.
A useful method I have devised is to look at the individual items of expenditure in each category (the Excel filter feature is great for this) closely. I then force myself to write down two ways in which I could reduce my net expenditure in that category.
For some categories identify potential ways to save money is easier than for others. Below I have included an example from a budget I set myself a couple of years ago.
Categories & Potential Savings
Rent/Mortgage
- Move to a smaller/cheaper apartment
- Rent the spare room to a lodger
Utility/Household Bills
- Cancel my satellite TV subscription
- Move to a cheaper mobile phone tariff
Groceries
- Buy less ready made meals and cook more meals myself
- Buy more cheaper ‘own brand’ products
Eating Out
- Only eat out in the evening once a month
- Take a packed lunch to work instead of buying lunch out
When generating these ideas do not worry if some of them are seemingly impossible to implement (for example maybe you need your car to get to work so you can’t sell it). The idea is to simply brainstorm and get down at least two ideas to save money in each category.
5. Set Yourself Targets
As is the case with diets shock therapy may seem like the quickest approach but it rarely works. If you immediately try to stop all non necessary expenditure you’ll almost certainly become disillusioned and unsuccessful in your attempts to save money very quickly. As is the case with dieting you stand a much higher probability of succeeding if you make small consistent and incremental changes to your spending habits.
Out of the list you generated above select a minimum of five items to implement throughout the next month. The best way is to write them down in your Excel sheet. You now have a set of direct actions to do next month that will save you money. Be sure to refer back to this list every couple of days so you do not lose sight of your goals.
When setting your budgetary goals it is important to be realistic. If you set yourself targets that are too hard you’ll fail to reach them and will most likely become disillusioned
A good example of setting achievable/realistic goals came when I did my first budget. Rather than stating I would make a packed lunch to take to work every day I knew that because of the hectic nature of my lifestyle, and very long work hours this would not always be possible. Instead I pledged to take a packed lunch in at least twice a week. While the potential saving I made was less, i knew I was much more likely to achieve this and make the change a permanent feature of my weekly routine.
6. Allow yourself small rewards
While the aim of setting yourself a monthly budget is to save you money, you probably don’t want to do so by not going out, buying nothing and eating food you don’t like. The aim here is to save you money, not make your life miserable!
A good way to keep your motivation up is to allow yourself small rewards out of the savings if you are successful. For example why not treat you and the family to a meal out at the end of the month with some of the savings you make?
Budgeting Conclusion
Once you have worked through the above process and implemented a few of your savings approaches you’ll be amazed at how easy it all was. In fact very early on in the process you will most likely start questioning the money you spend on a daily process much more than you did in the past.
Do you have any useful money saving tips that have helped you reduce your monthly expenditure? If so we’d love to hear them or hear about your budgetary successes. Just leave us a comment below to share them with us.
In this post we’ll discuss some basic tips that will help you become a successful landlord if you are thinking about getting a buy to let property. Below are some of the main things you’ll need to consider when choosing and selecting a buy to let property to invest in.
Before investing in any buy to let you should put together a financial forecast working out how much money you expect to make from the property. Such a forecast should include income and expenses such as mortgage repayments, expected rental income, maintenance costs, income tax, service charges etc. Only by forecasting these things will you be able to decide if the property is a good investment opportunity.
Plan for 9 Months Occupancy
One common mistake new landlords make is presuming that the property will be let out for the full 12 months out of the year. In reality the actual occupied time of the property you rent out will be much less. Your rental property may be empty for a period of time after tenants have moved out while you look for another tenant.
There are many reasons why you may have periods where you are receiving no rental income from your property. Depending on the local market the property may be left vacant for a while while you struggle to find someone to move in. You may need to do maintenance work to the property between tenants again increasing the time the property is not receiving any rent. And of course every landlords worst nightmare, your tenants might stop paying their rent which may mean you go without rental income for a few months while you evict them.
As a general rule most experienced landlords do their financial planning assuming they’ll receive rental income for 9 months out of the year. While you may get lucky and have tenants stay for several years you can equally have tenants move out after every 6 months lease is up. Planning for 3 months unoccupied will hopefully be conservative enough to deal with any rent free periods without causing you financial problems.
Factor in Interest Rates Rising
With interest rates at incredibly low levels it is easy to lose sight of what might happen to your rental business should interest rates begin to rise again. In the 1980’s in the UK interest rates reached over 15%. Could you afford to keep paying your buy to let mortgage if that happened again?
OK so rates probably won’t reach 15% again in a hurry however your variable rate buy to let mortgage could well get 2-5% more expensive in a relatively short period of time. When you are working out the finances on a new buy to let property it is well worth considering what the mortgage repayments would be if interest rates rose by a few percentage points. You can work this out easily by using are mortgage repayment calculator.
Buy To Let Income Is Taxed
If you are going to be making an income profit from your buy to let it is important to realize that your profits will be liable for income tax. Basically that means that you have to pay the government tax on any profit you make from your buy to let.
Taxable Income = Rent received less Interest Paid On Mortgage less Maintenance Expenses
Tax Paid = Net Profit x Your Income Tax Rate
It is worth noting that mortgage interest is a tax deductible expense in the UK. This means that you can offset any payments made as interest on your buy to let mortgage against the profits, before working out your tax bill. In addition any direct maintenance expenses such as wear and tear, decoration, legal fees etc can also be offset against your profits, reducing your tax bill.
If you do not do so already you will need to start submitting a self assessment tax return each year as soon as you start receiving income from your buy to let.
Factor in Maintenance Costs
As mentioned in the point above you should also bear in mind the fact that you will incur maintenance expenses on your property. Hopefully these will not be too excessive, maybe a lick of paint every couple of years, however do not lose sight of these in your financial forecasts.
Also try not to ignore the maintenance needs of your property. If you fail to spend small amount regularly on small jobs, you may find you have bigger problems (and bills) to deal with a few years down the line.
It is a very good idea to plan for larger one off maintenance bills (such as a new roof, new kitchen, new bathroom suite etc) by setting aside a small amount of the monthly profits into a contingency fund you can avoid having to find a substantial amount of money for an unexpected one off expense.
Insurance For Tenants In Rented Property
If you are living in rented property then you should be sure to understand what types of insurance you require. Usually it is the landlords responsibility to insure the building and any contents (furniture and furnishings) that belong to him or her. This insurance will not include your (the tenant’s) possessions or any accidental damage you may cause to the landlord furnishings. It is essential that you obtain tenants insurance to make sure you are covered incase anything happens to your possessions.
It can be very easy to forget about buying rented propert insurance when you move into a new property. You should not think of contents insurance as an option but instead as a necessity. Should you get burgled or accidentally damage anything in your new home the right insurance policy will ensure it gets replaced with minimum fuss.
When you choose an insurance policy it is worth taking the time to ensure it covers your for your particular needs. Many policies for example will have a limit on high value items so if you have a particularly expensive stereo or camera for example you may need to specifically state this to the insurer when you take out the policy to ensure it is covered. Another item that is often not covered unless you state it are bicycles.
Above we’ve already mentioned some of the key things to look out for when choosing your property insurance. Other features of a good policy should include the following:
- Theft of possessions (via break ins)
- Theft or loss of possessions when you are not at home (say if you lose you ipod)
- Accidental damage to the landlords property or possessions (for example damage caused by a burst pipe)
- Replacement locks should you lose your house keys
- Replace old items with new ones should they be stolen
- Accident or injury to you and your guests
- Loss or damage to possessions by fire, floods etc
One thing you should do is be honest when obtaining insurance quotes. Insurers will ask you all kinds of questions such as where you park your car, what your profession ism the value of your possessions. Be sure to give them honest answers to ensure your policy is valid.
Also beaware that some policies will only be valid if you have particular locks fitted. In this instance you may be able to get your landlord to fit better locks to windows and doors, or at least to share some of the cost.
Insurance for Landlords of Rented Property
Many landlords forget that they still need to insure the property that they rent out. As stated above all landlords should at least take out buildings insurance on the property. While many owners of rented property do do this there are other types of landlord insurance that should be considered.
One of the most popular types of insurance taken out by landlords is insurance against your tenants not paying their rent or insurance against rent free periods when you are looking for new tenants. Many landlords fail to see how dramatic the impact can be if say they had to go for 6 months without receiving any rent from their property. How would they pay the mortgage? Depending on your financial situation it can be a great peace of mind to know that you are insured against any rent free periods, allowing you to plan your finances with much great certainty.
All landlords should take out landlords liability insurance. This is basically insurance against any accidental injury or damage that your property may cause your tenants or their guests. Typical causes of injury may be a faulty light switch, leaking gas pipe or simply any injury caused by the property.
Of course as a landlord you should insure your property for the contents you have in there. At the very least you are likely to have curtains, carpets, a few white goods that are left in the property with your tenants. These items should be insured in case they are damaged or fail.
