When I wrote the MeaningfulMoney Handbook in 2018 (get it at petesbook.com) I wanted it to be the one book that most people would need to go from zero to hero with their personal finances. It was designed for anyone to be able to work through and to begin to take control.
The final checklist covered in this series is a kind of 20-odd minute condensing of the book, which should be fun, and not at tall order at all! It should serve as a kind of catch-all checklist for getting your personal finances in order.
Spend Less Than You Earn
If anyone asked me to sum up how to achieve financial success in one statement, this would be it. If you constantly spend more than is coming in, you will always go backwards, it’s simple maths.
No matter how big the numbers, if you spend more than is coming in, you will get poorer. This is why lottery winners and football stars go bankrupt. You can always spend it all, and more, no matter how big the numbers are.
Without careful spending control, you will never have anything to put aside for the future. You’ll never have any money for a foundation of protection. You’ll never have ANYTHING! You’ll never amass any wealth.
Spending less than you earn means sticking to a budget. But the problem is that this word strikes fear into many people. Some people even avoid using the word budget at all, in case it puts people off, which I really don’t understand.
Whether you call it a budget, a spending plan, or whatever, controlling your expenses requires forethought and planning. It forces you to be intentional about where your money goes. It should be forward-looking, not retrospective. Budgeting happens in the future, not the past.
I did an Ultimate Guide to budgeting last season, which you might find helpful.
Pay off Bad Debt
Before your spending was under control, you may have amassed some debt like credit cards, an overdraft and even some payday loans. As long as this bad debt is hanging over you, you’ll never be free enough to move forward.
I use the distinction of good debt and bad debt, because it’s important to understand that some debt can actually help you to progress towards financial freedom. The distinction is simple enough: bad debt is high-interest and is used to buy stuff which falls in value.
Buying a TV on a store card is bad debt, because store cards usually have double-digit interest rates and TVs are basically worthless the second you get them out of the box. A mortgage, on the other hand is usually low interest and houses generally increase in value, given enough time. That’s good debt.
Sure, you can use credit cards wisely as part of an intelligent spending plan if there are benefits attached, but I’m speaking here to those who have found themselves in a bit (or a lot) of a debt hole.
Maybe things get a little bit worse each month and payday takes longer and longer to come around. If things are really bad, you should seek help. There are some superb debt counselling charities around who can help you get on the right track.
The best method I know to beat debt is the Debt Snowball where you focus on one debt while paying minimum payments on all the others. When that one debt is gone, you move onto the next, and so on and so on until all the bad debt is cleared. It’ll often take while, but it is SO worth it!
It probably won’t surprise you to know that I also did an ultimate guide to debt elimination in Season 18.
Pay Yourself First
As well as spending less than you earn, another core principle for financial success is to pay yourself first. You should be your number one priority. If you’re paying down debt, it’s because you want to make your own financial situation better, not because you have to (although you DO have to!)
If you’re saving for the future, then that should be the first thing you do whenever you get paid. Paying yourself first is a matter of priorities. You save for the future even before you pay your utility bills and your food.
The first thing you should use your ‘pay yourself first’ money for is to put a buffer between you and the world. You know what I mean: life has a way of throwing things at you that you aren’t expecting.
A larger-than-expected bill for the car service. A mercy dash across the country to look after a loved one, incurring unpaid leave from work and travel costs. The laptop you must have for your self-employment suddenly not turning on one day.
That buffer is made up firstly of an emergency fund. This can start small, just £500 or £1000, especially while you’re paying off bad debt. But once you’re debt free, you should increase this to between three and six months of your minimum monthly outgoings.
It’s hard to overstate just what an incredible feeling of freedom this gives you. Knowing that you could survive if you weren’t paid for three months is golden. If you’ve ever lived paycheque to paycheque then you know what it’s like to have gnawing sense of anxiety that you should be able to make it to pay day as long as nothing bad happens.
An emergency fund means that if (when) something bad happens, you’re able to shrug it off. On top of the emergency fund, there’s another thing you should use your pay-yourself-first money for.