Good Spending Habits
Save a Percentage of your Income Each Month
This is easier said than done, especially during these tough economic times where living costs are high. However, there are many incentives to save, none more so than having a solid emergency fund.
Emergency funds are basically there to cover any unexpected expenses such as broken down cars or household appliances. Even a small emergency fund could mean the difference between you getting into unmanageable debt and keeping your head above water. Sparing just £10 a month will help, and even pennies in a jar can build up over time. Although you may not be able to save a lot, you’ll find that you’ll be thankful for any amount of extra cash if things get tight.
Use your credit card sparingly
Credit cards are extremely convenient, which is why many choose to use them on a regular basis. The fact that you are not physically handing over cash can make it feel like you’re not spending money at all, which is where the problems begin. A good habit to get into is to only ever use your card for specific purposes such as fuel or grocery shopping. By doing this you should have a good idea of how much you are spending each month meaning there’ll be no shocks when your statement comes through.
Limiting your spending and ensuring you budget for the full balance each month will mean you’ll avoid all interest charges and save money.
Prioritise Credit Commitments
Regardless of your financial situation, credit commitments should always be your number one priority. One way to ensure that they are number one on your list is to move all your direct debits so that they are withdrawn on or around your payday. By doing this you can also be confident that there will be sufficient funds in your account.
Failing to prioritise credit commitments could lead to missed payments which could affect your credit history and result in late payment fees or charges being attached to your account.
Bad Spending Habits
Spending More Than You Earn
According to 2010 statistics from The Telegraph, over 5 million adults spend more than they earn. While many put these figures down to irrational spending, others blame stagnating wages and increases in the cost of living. Whatever the reason, it’s important that you take action and make changes to your lifestyle accordingly.
The main danger of spending more than you are earning is that it can quickly lead to what is known as a ‘debt spiral’. The debt spiral looks something like this:
- You spend more than you earn;
- You borrow to fill the gap;
- Consequently you spend more of your income repaying debts;
- Which means you then need to borrow more in order to maintain your lifestyle;
- The end result is that such a large portion of your income goes to repaying debts that you no longer have money to spend on anything else.
To avoid this debt spiral, there are a few things you can do. The first and most important is to change your lifestyle and the rate at which you spend your money. Unfortunately this will mean going without luxuries until you get your finances back on track. Next, look for areas where you can save – your first stop should always be your variable outgoings; the things that vary in cost on a month to month basis such as fuel, leisure or the monthly shop. If you can cut down on the amount you are spending on these, then you will notice big changes in your surplus income. Try cutting back on the amount of energy you use in the home or the amount of money that you spend on take-aways or coffee; you’ll soon find that your earnings can go further when you’re not spending them on things that you don’t actually need.
Only Making Minimum Payments on Credit Cards
Paying off the smallest amount that you can get away with by using the minimum payment facility on your credit card(s) is something that should be avoided wherever possible. This is because it can be easy to fall into a credit card induced debt spiral, where you’ll only ever clear small amounts off the balance each month.
The value of the minimum payment required will be based on a percentage of the total balance; usually between 1% and 3%. The difficulty is; as you are chipping small amounts of the balance each month, interest is accruing at a similar rate, so in reality you may only be clearing a few pounds off the total balance each time you make a payment. Unfortunately, as the balance gets smaller so do the minimum payments, meaning it could be decades before you get completely debt free. Try to tackle your credit card debt as aggressively as you can to break the interest/debt cycle.
Not Planning Ahead
Having some form of financial plan is vital in order to avoid any nasty shocks. For example, your car may need a full service at the beginning of next month, which means that it may not be a good idea to spend the last of this month’s wages on leisure purposes. While accurately mapping your finances is tough, knowing when outgoings are due isn’t. It’s all about having knowledge of your finances and thinking slightly outside of the box when budgeting or repaying guarantor loans.
One tip that may work for you is to include a ‘notes’ section within your budget. In here you can detail any quarterly, semi-annual or annual expenses such as vehicle tax, MOT and insurance, along with all the dates that these payments are due. If you struggle with keeping track of your direct debits, then try to move them all to a similar date, preferably straight after payday. Alternatively, opening a separate bank account and transferring your spending money into it can prevent you from chipping in to the money that’s ear-marked for bills.
The reality is that your bad spending habits could be costing you substantial amounts every month. By breaking these habits and replacing them with good ones, you’ll not only see your disposable income rise, but you’ll feel much more in control of your finances going forward.