Finance for Women
Module 3: Check your balance
Hi there. You’ve made it to module three!
Now you have had a good look at your financial past. Lets get right up to date by assessing how your present is functioning.
Every decision is a financial decision
Every decision you make in life is in part a financial decision. And most of them have permanent impact. You know the line that mother’s use to children when they pull silly faces. “If the wind changes you’ll stay that way.” Well, every day, when you make decisions for your life without running them through a healthy financial filter those decisions change the way your future looks financially and it stays that way.
For example, you decide that you have just had enough of being unfit and you are going to join the gym. You pay the membership, buy the latest gear, go along, sweat it out for a few weeks and bit by bit, you go less and less, until you don’t go anymore. Then you either tell yourself you don’t care anyway, or you resign yourself to just being unfit for another while. Too bad!
Joining the gym may have been a health decision but over in the other corner, it was also a financial decision. Now, I’m not talking about the kind of cursory financial decision making that I am sure you did at the time; the “can I afford it?” kind of decision that we make 100 times a day. This kind of “Can I afford it?” usually means, “Can I actually meet the payments?” which is an important part of any financial decision.
However, it is the last item on a financial checklist that only works if there are several other items ahead of it. Items such as, “How will this additional monthly payment affect my net income” and “What impact will this have on my annual budget?” Or “How does this fit with my net worth targets?”
“Oh no!” I hear you scream, “she’s gone over to the other side. She lured us into a false sense of security and now she’s talking that accountants double entry double speak I was afraid of all along. I’ve wasted my money“.
Well mark this spot! This is the spot you are going to come back to in three weeks time to re-read those sentences and not only understand every word but really know what they mean to your life.
How to Have Money
This week, we are going to concentrate on the most primary aspect of financial management. It is so simple that it is often overlooked, but making this part of your decision making will have more impact on your future finances than any single other item ever.
It is spending less than you earn.
In financial terms it this known as having a “monthly net profit” at the end of every month. If you spend more than you earn it is known as a “monthly net loss”
You might think that this does not sound sexy or fun, but take it from me; this is where all the fun lives in our financial lives.
That dream home, the 3 day working week, the retirement in Spain or just not having to work every day to pay bills until the day you drop dead, are all hiding in the difference between what you earn and what you spend. And more than that, that course you want to take, the job change you’ve always wanted to make, that business you’ve always wanted to start all live there too.
You see your income has two functions:
- First, as you know, it has to pay for your current lifestyle.
- Second, it has to contribute to setting up your future.
If you use all your income to pay for now then you have none left over to put towards tomorrow. That is exactly what we are encouraged to do with our money. Even worse, a large percentage of the population uses all their income plus some they borrow from the future (credit cards, loans, etc) to pay for now.
It wouldn’t be so bad if we were all totally happy and fulfilled spending all our income now. But we’re not. It may be what everyone does, but it doesn’t work. I’m not suggesting you stop going out and save all your money for blue rinses.
I am suggesting that you take your monthly income and BEFORE you do anything else, you put 10% towards tomorrow. It’s easier than it sounds. How many times have you set up direct debits for something and then just paid them month after month forgetting that you even had them. This time, you would be paying yourself. What a bonus.
But before you can decide on whether or not you will put 10% towards tomorrow, you have to find out 10% of what. You need to know your income and your expenditure. Then you will know what 10% is.
Exercise: What is your income?
This exercise is designed to help you document how much money you take in each month. In financial terms this exercise is about establishing your “Income”.
What that means is that you will list all sources of income and how much they provide.
- The total you take in every month is your “monthly income”
- When you multiply that by 12 you get your “annual income”.
You probably won’t need any help with this part; it’s self-explanatory. I have however given you some headers as it is easy to forget some less obvious items or not realize they should form part of your list.
The entire exercise should take you less than 30 minutes. Round off numbers to the nearest £. Estimate on the low side. If you are not sure of a value, make a good guess. But in this area it is important to get a real figure as soon as you can get the information.
In your notebook on a new page write “Income” across the top and underneath list everything you currently have coming in every month. Here are some headings to jog your memory:
- Salary
- Business Income (net of expenses and taxes)
- Child benefit
- Royalties
- 2nd Job
- Dividends.
If your salary is irregular or commission based, take your total annual salary for the last year (less any exceptional income that you might not usually have) and divide it by 12.
You can print out the form below to help you complete this task.
Income Calculation
| Source | Amount | Weekly | Monthly | 3xMths | 6xMths | Year |
|---|---|---|---|---|---|---|
| Sample 1 | 327.00 | x12 | 3924.00 | |||
| Sample 2 | 50.00 | x52 | 2600.00 | |||
| a. Salary | ||||||
| b. Business After expenses and taxes |
||||||
| c. Rental | ||||||
| d. Child benefit. | ||||||
| e. Second Job | ||||||
| f. Dividends | ||||||
| g. Other: | ||||||
| h. Other: | ||||||
| i. Other: | ||||||
| Your Annual Income: | ||||||
| Your Monthly Income: | ||||||
Excercise: What are Your Expenses
The second task is designed to help you identify how much your life is currently costing you. In financial terms this exercise is about establishing your “Expenses”.
What that means is that you will add up everything you spend in a month and list what you spend it on.
- The total you spend every month is your monthly “Expenses”
- When you multiply that by 12 you get your yearly expenses.
Now this time, really don’t panic.
Admitting to exactly what you spend is perceived as such a frightening thing. In reality, knowing what you spend and on what is one of the most comfortable pieces of information you can carry in your head. And remember your expenses are just one piece of a jigsaw of several pieces. Only when it is all put together can you see the picture clearly.
Again, I have given you easy to follow instructions on how to complete this first exercise. I recommend you take a moment and read all the way to the end to get an overview. The entire exercise should take you less than 2 hours in total during the next week although you may have to wait in between the beginning and the finish for some of your questions to be answered. Round off numbers to the nearest £. Estimate on the high side. If you are not sure of a cost, make a good guess.
In your notebook on a new page write “Expenses” across the top and underneath list everything you currently spend your money on. I have given you a list of items to jog your memory at the end but replace these with your own personal list. You know what you spend your money on. The more detail you put into this list, the more information you will have for clear decision making later on.
Do not spend much time searching out exact figures, estimate and move through this exercise quickly. As you actually spend during the month ahead you can compare back to your estimates and update them until you have a more accurate picture. There is often a difference between what we spend and what we think we spend. The areas of difference will highlight your “blind spots” in your spending…. If you have any.
The easiest way to get the complete picture is to begin with your regular bills or your direct debits. Take each of these, for example your mortgage, and fill in the amount you pay each month. Then fill in the smaller items, such as groceries, etc with an estimate for each area of expense in your household.
Some commonly asked questions
- What do I do with bills that I pay once yearly?
You divide these evenly by 12 and put the value in each month. If you pay your car insurance once per year, you still drive it twelve months so the cost is actually a cost to you each month you use your car. - What do I do with bills that I pay twice yearly or quarterly?
You also calculate the monthly figure. If you pay twice yearly, multiply the figure by 2 and divide by 12. And so on. - My electricity/telephone/gas invoices are two months in arrears. How do I calculate what is for one year.
Take the payments you made over any twelve-month period, add them together and divide by 12. - What do I do if my expenses are mixed business and household or if I run two homes?
I strongly recommend that you fill in a separate sheet for each household or for your business. It is not so important at this stage it will give you clearer information for decision making further into the exercises. If you have more than one household or a business, take a separate page for each. - Christmas is a big expense in my household. Do I put it all in December?
Even though you spend the money in December, estimate the amount you spend on Christmas and divide it by 12 and add it into your monthly expense. The same goes for your summer holiday and other seasonal events. You still need to earn the money throughout the year to finance these.
That’s all there is to it, so go back now to the start of this Expenses exercise and put in your own list and numbers. Focus on one item at a time.
Expenditure Calculation
| Item | Amount | Week | Month | 3xMth | 6xMth | Year |
|---|---|---|---|---|---|---|
| Sample | 22.00 | x52 | 1144.00 | |||
| Sample | 432.00 | x4 | 1728.00 | |||
| Taxes | ||||||
| Rates | ||||||
| Rent/Mortgage | ||||||
| House Insurance | ||||||
| Electricity | ||||||
| Fuel (home) | ||||||
| Gas | ||||||
| Telephone | ||||||
| Medical Insurance | ||||||
| School Fees | ||||||
| TV License | ||||||
| Water | ||||||
| House Maintenance/ Décor | ||||||
| Car Insurance | ||||||
| Car Maintenance | ||||||
| Car Tax | ||||||
| Petrol | ||||||
| Travel | ||||||
| Investments
(list each one) |
||||||
| a. | ||||||
| b. | ||||||
| c. | ||||||
| e. | ||||||
| f. | ||||||
| g. | ||||||
| Groceries | ||||||
| Clothing | ||||||
| Kids Clothing | ||||||
| Kids Care | ||||||
| Kids toys | ||||||
| Personal Care | ||||||
| Household Equipment, | ||||||
| Cleaning | ||||||
| Books/Mags | ||||||
| Music | ||||||
| Restaurant/Entertainment | ||||||
| Sport | ||||||
| Hobbies | ||||||
| Toiletries | ||||||
| Pet care | ||||||
| Sundry Expenses | ||||||
| Bank Charges | ||||||
| Credit card Interest, | ||||||
| Legal/Professional fees | ||||||
| Dentist | ||||||
| Medical | ||||||
| Charitable Contributions | ||||||
| Courses | ||||||
| Gifts/Presents | ||||||
| Holidays | ||||||
| Christmas | ||||||
| Stationery/Postage |
Actions of the Week
1. Calculate your monthly net profit/loss
Now you have your monthly Income figure and your monthly Expenses figure.
Subtract your Expenses from your Income.
- If the result is a positive figure; that is if your Income is higher than your Expenses, you have a “monthly Net Profit.”
- If the result is a negative figure, that is if your Income is lower than your Expenses, then you have a “monthly Net Loss.”
2. Feel good!
I want you to practice feeling good every time you part with your money this week. Whether it is writing cheques for your bills, paying for your groceries or buying yourself something.
Every time you hand over your hard earned cash this week, take a moment to think about the joy you have using the product you are buying. Whether it is the electricity that keeps your home warm or food that tastes wonderful, feel a moment of gratitude to those who produce it for you.
They are real people who are going to receive your money. Imagine if it was you.
How great would you feel if someone was buying your product and you were receiving the money?
3. Do nothing!
Whatever the results of this week’s work – do nothing yet.
Especially, please don’t worry if you have calculated a monthly net loss. By the end of the next module, you will have tools to give you a new perspective on how to approach a net loss situation. If you have a monthly net profit figure, the same tools will help you improve that even more.
Content © 1999-2009 Fiona Harrold Consultancy. All Rights Reserved.