FOOL SCHOOL
Spend Less Than You Earn

January 15, 2003

It may seem like stating the obvious when we say you need to "spend less than you earn". But it is so important that we make no excuses for it. Simple common sense is one of the most important weapons at your disposal in the battle to take control of your finances. Most people have a fairly good idea whether they are a net spender or a net saver each month but we need go a little bit further just to find out how big that hole is. We also need to nail down exactly where all our money goes so that we can see where we can make the easiest savings.

It's back to that bit of paper again. Or, if you prefer, you could use this handy little calculator set up by one of our regular users. On one side list your income, what drops into your bank account each month. On the other list your expenses. Here are some common examples to get you started.

Income

• Salary
• Interest from savings accounts
• Dividends

Expenses

• Mortgage/rent
• Loan payments
• Credit card payments
• Utility bills
• Insurance
• Subscriptions (clubs, magazines etc)
• Council Tax
• Food
• Clothes
• Going Out
• Travel
• Holidays

You won't incur all of these expenses every month. But you need to work out what you spend on average. Consider what you might spend in a year and then divide by twelve. Like the list of assets and liabilities if in doubt be conservative about your income and overestimate rather than underestimate your expenses. Don't worry about being accurate to the nearest pound either.

OK, take the expenses away from the income and see what you've got. Once again, don't panic if it's a negative number. If we going to take control of our finances then we need to get to the situation whereby we are saving 10% of our net income on average each month. The higher the better but if we are looking at less than 10% then it's difficult to argue that we are truly in control.

We've calculated the amount you save as what is left after all your other expenses. But, in order to take control, it's best to flip that idea on its head. Pay yourself first and then turn your attention to other expenses. An excellent way of forcing yourself to do this is by setting up a regular monthly payment into a saving scheme. Start as low as you like but get into the habit of doing it.

> Financial healthcheck - Part 1 | Part 2 | Part 3 | Part 4