Financial road maps

Having a plan is important in many areas of life, I would feel it is vital in personal finance, yet a surprising amount of people totally fail on this matter and go through life in an ad hoc manner and they are often wondering why some people seem to do better even though they don’t earn as much as they do. Animals in the forest don’t worry about finance, they do worry about food though, hence they gather for winter, squirrels have figured this out so it is disappointing, given the superiority of human intellect, that many private individuals have not planned for an ‘economic’ winter.

A simple method is a budget, it can be complex or it can be crude but in either case having a crude one is better than having none. Sometimes this is worked out using percentages, for instance:

After tax income x 60% = all expenses (mortgages, bills, food, entertainment etc.)

After tax income x 10% = discretionary expenses (something you may have buy from time to time)

After tax income x 10% = slush fund (a fund kept for short term needs, and potentially to invest with in the future)

After tax income x 20% = savings (good old fashioned savings)

You can quickly determine whether you are living inside or outside of your means. If you are inside then well done, if you are outside then it is time to make some adjustments. Interest rates are dropping so it is making life easier, you should be better equipped (assuming you have a job) to keep to a % based budget now than you may have been in September of 2008.

A slush fund is important, a long terms savings plan is of course a foundation, but a slush fund is money that can cover unexpected events. Smart savings on the other hand will involve some pension funding as well as market leading deposit products. Liquidity is always important and therefore having some liquid cash is sound planning.

Tackle debt, everybody seems to be deleveraging and there is a reason for it, as money becomes harder to obtain during a hard recession (as this one is and will be) reducing or removing debts makes getting by easier by getting rid of debt outgoings. Their is a hierarchy of debt, familiarise yourself with it so that you can focus on the biggest offenders first (eg: credit cards come ahead of car loans).

A slush fund, if built over time, should equate to roughly four months income, once that is met you don’t need to keep adding to it, you can put the excess into other areas of your finances. If you do arrive at this point then you will have totally revamped your finances, it means you likely have a great handle on what you do and don’t spend on and where your money is being spent.

These figures are guidelines and using a percentage based approach will not work for everybody, in particular if you have young children or a parter who is recently out of work doing something like this will not be easy, having said that, it is never too late to learn a little about money and become financially literate so irrespective of your situation, if you have not made some plans now is the time to start!

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