Why financial strategy matters
This past year has shown just how unpredictable the world can be. But when your finances in check, unforeseen challenges become much easier to deal with.
As the old adage goes, ‘change is the only constant’. If anyone needed a stark reminder of that, 2020 did a pretty spectacular job. The global pandemic served as an example of how life can change suddenly and dramatically, and whilst we may not experience disruption on this scale every year, having a financial strategy in place will always help in unforeseen circumstance.
“The downturn in markets has obviously affected our investments and long-term savings, but many families are scrambling to deal with the income hit as jobs are furloughed and bonuses cancelled.”
Jason Butler, Columnist, Financial Times
This may sound a bit ‘doom and gloom’, but it doesn’t have to. A solid money-management strategy will enable you to comfortably weather difficult periods and creating one is a lot easier than you might think.
In this blog, we’ll be outlining two key features in successful money management: creating an emergency fund and following day-to-day budgeting tips.
Creating an emergency fund
An emergency fund is a certain amount of money that you leave in your bank account in case of costly, unexpected incidents. The most obvious example of this is job loss, but a broken boiler, unwell pet or car trouble can all be a big hit to your bank balance.
Your emergency fund should generally cover you for 3-6 months without employment. It doesn’t need to cover how you live your life currently, just all essential living costs. How much you should save is dependent on your situation. You should aim for closer to 6 months if:
- You are a freelancer/contractor
- Your work is seasonal
- You live in a high-cost area
- It is likely to take some time for you to find a new job
- You have children/others depending on your income
- You have a mortgage
If those factors don’t apply to you, just start with a 3-month fund for now and go from there.
Once you’ve established how much you want to save, the first thing you need to do is make a list of your monthly outgoings.
A great piece of advice here, don’t make this list from memory or estimates. There will always be things forgotten – haircuts, toiletries, that late-night Saturday takeaway. Go through your bank statement and include everything. The more honest you are with yourself, the easier this will be to achieve.
Once you have calculated your essentials, identify 10 things that you wouldn’t want to be without. Your Netflix subscription perhaps, a fortnightly trip to the cinema, a nice meal out – whatever is important to you. Remember, a realistic budget allows you to gather momentum, sustaining effective money management protocol.
Everything that’s not on that list, cut it out. This might not be easy, sales may tempt you, or an impulsive night out may come calling. Fight the urge; the quicker you’ve got your emergency fund built, the sooner you can incorporate these things back into your life.
Not before long, you’ll see your pot filling up. If it’s not filling up fast enough, cut your luxury list down to 5 – or however many you see fit. To further reduce your expenditure, reducing inflated costs through market research can always help.
All too often, critical services such as utilities, banking or digital subscriptions creep up in price. Shopping around is a must. Just because you’ve used a service for five years doesn’t mean that it’s most suitable. Many bank accounts charge fees for transferring internationally; look a little deeper, you’ll find banks like ourselves providing excellent services free of charge.
Day-to-day budgeting tips
When you reach that wonderful moment where you hit your target, you may want to celebrate. There’s certainly nothing wrong with that – you’ve earned it! However, try to avoid falling into bad habits. The last thing you want after putting the effort in to create a robust emergency fund is to blow it all within the next month or so.
The following tips will help you keep hold of your pot, and help it grow, without feeling restricted.
The 50/20/30 rule: Senator, Elizabeth Warren, coined the term 50/20/30 in her book All Your Worth. The philosophy is built on three categories: needs, wants and savings. Needs should comprise half of your income; anything from mortgage repayments to grocery shopping would fall into this category. A Want should make up 30 per cent of income; you need to enjoy a high proportion of your wealth – you earned it! Savings speaks for itself; you always need a consistent stream of money trickling into your savings account. 20 per cent, according to Elizabeth.
Use money-management applications: We don’t need to go to the cashpoint these days. Those glaring figures are only a click or two away. Make sure to take advantage of all the features internet banking has to offer. Split your finances down using their features.
Offset higher purchases: Being more careful with your money doesn’t mean you’re not allowed to make big purchases like a holiday or a sofa – you have every right to. Just remember your budget. If that’s coming out this month, what are you going to sacrifice to allow for it?
Reexamine the budget you created: Once you’ve sorted out your essentials, listing 10 things you wouldn’t want to be without, you probably had to cut out a fair amount of expenditure. Which items have you found easiest to cut? Ask yourself, how often, if ever, do I need to spend money on this?
Use cash for certain expenses: If you’re prone to splurging, use cash for certain expenses like eating and drinking out. When the money is right there in front of you, and you can see how much you’ve got left for that week or month, it’s easier to be strict with yourself. Going old-style can really help. Withdraw your weekly allowance. Going old-style doesn’t stop with cash; grow your own veg, repair your clothes. Sustainability crosses many realms.
Once you break it down, an emergency fund isn’t tough to create and maintain – and it teaches you some good habits for life. Hold yourself accountable. Instil financial strategy. Soon you’ll be able to start thinking about pensions and housing deposits no matter the circumstance.
Download the VIALET app now and start saving for a rainy day today.