Pay Yourself First

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Take a paycut and invest in your own financial futureA short post for this cold and wet Saturday afternoon.

To achieve financial independence you need to amass sufficient money/investment/assets to provide “unearned income” to replace your “earned income”.

Most will fail to achieve this in their lifetime simply because they spend first and then investment what is left (typically nothing!).

Those who build wealth know that you need to save first then spend what is less.

By effectively giving yourself a pay cut, say 10% of net income, you set this aside as your money for tomorrow. Only then do you spend what is left.

Whatever you decide to invest this money in, make sure it is taken from your bank account by Direct Debit immediately after payday, thus avoiding the temptation to spend it!!

Good luck 🙂

Personal Finance Management (PFM) Tools in the UK

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I have just been reading an interesting article by Rob over at money-watch.co.uk about Personal Finance Management (PFM) tools available to us in the UK.

Personally I have been using Microsoft Money for over a decade to manage my personal finances, which, together with my personal spreadsheets which have developed over the years, seem to serve me pretty well!

Unfortunately it would appear that the MS Money software has been discontinued in the UK but the version I used is still available from Amazon.

It would however appear that these services are now moving online – which is a natural progression since most of our personal financial activity seems to occur online these days – online banking, managing our ISA/Unit Trust/Sipp portfolios as well as managing our credit cards and various other financial commitments.

Anyway – be sure to check out Rob’s article – the first in a series.

Buy a Financial Calculator

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Anyone who is committed to increasing their personal wealth would be strongly recommended to buy a financial calculator.

I bought my first financial calculator when I was at University some 18 years ago, it was a Hewlett Packlard 10B Business Calculator, and I still use it today. The model has been updated now – Hewlett Packard 10BII – but the new model still offers the same great facilities I have come to know and love.

It carries out all the normal calculations you would expect of a scientific calculator, but also provides the ability to calculate the following:

Growth of a set level of regular savings, given amount, rate of interest and term in years is known
Net Present Value (of a range of regular inflows of cash)
Internal Rate of Return
Compound Interest Calculations
Time Value of Money

For example, if I save £100 per month, for 25 years, at 6% interest this calculator will calculate the future value of my savings (the answer is £69,299!). If I change this to 26 years, the answer is now £74,807 – an additional £5,508 for investing for another 12 months!!!

For retirement planning, say I have identified that I need a pot of £360,000 in 23 years time to retire on the income I need to live in retirement, I can calculate how much I need to invest on an annual or monthly basis, assuming any rate of return, to hit the target.

The third calculation I like to use the calculator for is calculating how long money will last for, for example, I have £10,000 today and I wish to draw £250 per month from it. Based on an interest rate of 4%, my calculator shows me that my money will last for 43 months.

Here’s the manual (4.0MB) for my Hewlett Packard calculator – it shows all the different calculations you can do with a financial calculator.

Buy a financial calculator from Amazon.

Related articles:

Rule of 72 – Time Value of Money

It’s Not How Much you Save, But How Long

Five Wastes of Money to Cut Out

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As part of my ongoing frugal blitz of my finances I have now identified 5 things I waste money on on a regular basis which I will now cut from my expenditure going forwards. These are common items which most people will buy now or at some time.

By opting for an alternative I can save a considerable amount of money each month!

Pre-packed Sandwiches

This is big business – everyone is selling them – supermarkets, newsagents, petrol stations. I usually buy a sandwich for my lunch as there is a large supermarket near my office. When you add the cost of the sandwich, a packet of crisps, a drink and some fruit I am easily spending upwards of £5.00 per day for lunch.

A typical pre-packed sandwich will contain the following:

1 Slice of bread
Some margarine
A filling (normally more salad than filling)
Plastic packaging

From now on I will buy sandwich bags from the supermarket and make my own sandwiches.

Bottled Water

Crikey – this stuff is more expensive than petrol! If I am in dire need of buying a bottle of water I will always opt for the larger 1.5 litre bottles as the smaller bottles are prohibitively expensive in my opinion. I have invested in a water filter for the office and keep it in the fridge.

Monthly Gym Membership

I signed up for the local gym about 18 months ago and, at first, I was very regimented and went 3 times each week. The monthly subscription started at £60 per month, which, based on my initial usage was £5 per visit, which I considered good value for money based on use of the gym, sauna, steam room, jacuzzi and a few lengths in their olympic-size pool.

Time and work pressures mounted to a point were now I go one a week if possible – this works out at £15 per session which is not great – I have looked around and can get the same equipment at my local “leisure centre” for a third of the price – so I am cancelling my gym membership but will reinstate it if my use of the local leisure centre increases again in the future.

Extended Warranties

I, like many others, are offered extended warranties when I buy goods in electrical stores. I never take the extended warranty as I don’t personally believe they offer great value for money – I instead ask what the cost is and place that amount in a savings account – I have managed to accumulate over £1,400 in the last 3 years.

Instead, I rely on the Sale of Goods Act 1979 – all products should be fit for their purpose and of merchantable quality. I have had to argue on a couple of occasions with shop managers but both times I have managed to get my item replaced.

Newspapers and Magazines

I generally find that newspapers and magazines are filled with articles I am not interested in or page after page of advertisements. Knowing that the majority of magazines with low circulation make their income from selling advertising space rather than selling copies, many magazines these days seem to simply be a collection of adverts, interspersed with the odd article.

Any news in print is out of date! I can get instant news online and therefore have no need to purchase a newspaper any longer.

Can you think of any other wastes of money? Please add your comment below.

Small Increases in Income Make a Big Difference!

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101-ways-to-make-extra-cash

When considering whether to move to a new employer, many feel that it is important to ensure that they maximise the amount of increase in income that they achieve.

Many would not consider moving to a new job for just £1,000 or £2,000 extra per year.

But it is the point of this article that a small increase in income can make a BIG difference.

When we consider the normal income and expenditure profile for a family we can roughly divide it’s expenditure into “fixed” and “variable”. An example of a fixed expense would be a rent or mortgage payment. It is generally fixed in relation to an increase in income – if you earn an extra £2,000 per year then generally you may stay living in the same property. A “variable” expense on the other hand is an expense which does or can change with income – for example – entertainment – if you’re earning more you may have a tendency to go out for meals, cinema, holidays more, therefore spending more on entertainment as your income rises.

So having considered this, we can see that all people have “fixed costs” and “variable costs” of living. The difference between total expenditure and total income is therefore what we like to think of as “disposable income”.

Having assessed your income and expenditure (see this article on cashflow forecasting) you will arrive at a figure for your “disposable income”.

For example, say your monthly take home pay, after tax and national insurance is £2,000, you have fixed costs of £1,200 per month and variable costs of £500 per month.

This gives total expenses of £1,700 per month and a disposable income of £300 per month.

Now let’s say for arguments sake that you could move to another job which earns you just another £100 per month after tax (£1,200 per year). Many would not consider taking this course of action, yet when we consider this in relation to your “disposable income” you have now seen an increase in your “disposable income” of £100 per month, from £300 to £400 – a 33% increase in disposable income!!!

This is an example of “leverage” where a small change in one variable results in a large change in another variable.

Now you might not get very excited about an additional £100 per month, but what if it was an extra £250, £500, or even £1,000 per month – what could you do with that additional income? I’m sure you could let your imagination run wild on this one.

Could you move to another job for an increase in income, or do something in your free time to earn more money????

What personal finance topics would you like us to cover?

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We are receiving a steady stream of contacts from people asking various questions, and although we cannot specifically provide “advice” in the regulated sense, we are keen to ensure that our articles are relevant to the topics you are interested in reading about.

Please comment below or contact us via our contact page to outline those areas of personal financial planning you are interested in reading about.

We will then take into account requests and suggestions when planning and writing future articles.

Hope you’re finding the site useful!

Simon