Step 2: Get Control Of Your Money

Getting control of your money is about spending less than you earn and then using the difference to fund savings and investments to get the miracle of compound interest working for you.

Ideally, you should aim to spend less than you earn most months of the year. If you already do this, you should be well on your way to financial freedom. 

If you don’t, there are many ways you can either increase your income or reduce your expenditure. Some can be relatively easy, like switching to a cheaper provider to get the same service for less money. Others will require a little more effort, like getting a part-time job, taking in a lodger or cutting back in some way (maybe taking one holiday a year rather than two).

Regardless of the state of your finances, though, you should know where you stand relative to your income and expenditure. The best way to do that is to draw up a budget.

Budgeting – the key to a healthy bank balanceEarningVsSpendingGraph

Budgeting is neither as scary nor onerous as it sounds. To start, make a list of your regular bills and how much they cost you each month, and check your bank account for any direct debits or standing orders. This should give you a good idea of your main areas of expenditure. Don’t forget bills than might come in annually, like car insurance. And also make sure you budget for things like home repairs, clothes, Christmas, birthdays, and so on. There are plenty of budgeting programs available on the Internet these days, but using a spreadsheet is fine, too.

If you’re not sure where your money’s going, keep a spending diary: for a few months, make a note of everything you spend, even if it’s £2 for a coffee. At the end, tot it all up to see how much you spend and where you spend it. It can be quite revealing!

Once you know your outgoings, it’s time to start trimming them. Most of the time there’s no need to cut back on the things you enjoy, but rather to get better value for money for the stuff you have to get anyway. You may even find you’re paying for stuff you no longer use, like a magazine subscription or gym membership.

If you’re spending far in excess of your income, you will need to take more drastic steps. We look at this in a little more detail in Step 4: Dump Your Debts.

Trimming the fat – the same products for less money

Start trimming your outgoings by reducing one major bill each month, prioritising the bills you pay on a regular basis. Sometimes calling your existing provider can be worthwhile, as they may be prepared to reduce what they charge rather than lose you as a customer. Alternatively, just shop around on the Internet for a better deal. Most people can save hundreds of pounds a year, if not more, just by making some simple changes. You shouldn’t have to look too hard, either…

  • Financial products
    Changing your mortgage, savings account, car insurance, home insurance or credit card is often one of the easiest ways to generate some surplus cash. The Internet makes this process a lot simpler than it used to be, as pricing is now so much more transparent and you can switch online.
  • Utility bills
    One of the biggest expenses most of us have, after rent or a mortgage, is energy bills. You can usually get a better deal by switching energy providers – just shop around online. Likewise, there are often savings to be made on mobile tariffs, broadband, fixed-line phones, pay TV and so on.
  • Smart shopping
    Fancy a break? However and wherever you’re making tracks, you can save by shopping around before you buy. With dozens of online resources dedicated to finding the cheapest meals, fares, accommodation, and so on, there’s no excuse for paying over the odds for anything these days.

Building an emergency fund

Once you are saving something each month, you should aim to set up an emergency fund so that you have money put aside to cope with any short-term financial emergencies, like losing your job. Opinions vary on how much you need for this. You probably want a minimum of three months’ expenditure, but you might feel you need more if, for example, you work in an industry where it’s hard to get a new job.

Once you have this cushion in place, then you look to use any surplus funds to grow your wealth.  But before we get to that let’s look at how the financial services industry works and how you can beat them at their own game.