Over the Christmas period I watched friends in different stages of financial confusion. There were those who had taken out an extra credit card and were already falling behind with the minimum repayments. Another who had taken out a 'pay day loan' and with the extortionate interest rates they couldn't see a way to ever get out of the spiral.
APR is the annual percentage rate used to explain the interest rate on loans. While credit cards regularly charge up to 20%, Wonga (a short-term loan company) openly declares that it charges 4214% and justifies this by saying their customers only take out the loans for very short periods. Yes, wow.
Another friend who had always been paid weekly was now in a monthly paid job and while her partner helped her for the first few months she was still spending all of her wages as soon as she was paid as she couldn't understand the adjustment needed. For some of us this seems daft. How can someone not realise they need to save and make their money last across a whole month? Her partner showed her the monthly household bills and when they had to be paid and she still wanted to withdraw all the money from the bank on pay day. This was simply a lack of financial education.
While budgeting doesn't sound like much fun neither is being in debt so spend a few minutes working out your personal budget and start 2013 off with more understanding of your finances.
There are lots of great online calculators (I liked the one on thisismoney.co.uk) to help you plan your budget but a pen and paper works just as well as there are three basic steps:
1. Know your income and know what you spend your money on.
2. Evaluate the income and expenditure side by side.
3. Keep a track of your spending once the budget is set and assess regularly.
Luxury or Necessity
Yes, as the advert used to say "You're worth it" but if you don't have the money to pay for it then think again. Beware of luxuries dressed up as necessities which are really needless costs. Sure, it can be nice to have a coffee on the way to work but do you buy it out of habit or because you really want it? Do you even drink it every day?
Not About Saving
This isn't about how to save money or how to be frugal. It's just about you having control of your personal finances. As a long term goal you should aim to spend no more than 90% of your income. That way, you'll have the other 10% left to save for your big-picture items.
If you'd like a step-by-step guide to setting your personal budget the Citizen's Advice Bureau has an excellent plan. You can also do a 'Money Health Check' for free on the Money Advice Service site.
Images: (c) cohdra & gracey