- June 16, 2014
- Bob Quinn
Let’s start with the basics: your household shouldn’t spend more than it takes in. To pitch your household income against your outgoings, download our free household budgeting tool here and see how you’re doing.
Conventional wisdom dictates you should live within your means. I would go a step further and challenge you to live below your means. Unless you can say you have retirement sorted, the rainy day fund boxed off and the children’s education fund taken care of, then you have work to do. But it’s by no means impossible. Let’s get to work.
It’s all about cash flow
As you are taking your first faltering steps down the road to full financial control, you may find that there are certain times of the year when a number of major expenses fall; Christmas is a good example. Another is when a number of insurance policies fall due at the same time. For me, August could be a bad month – my car and home insurances come up for renewal, and typically I am just back from a holiday – but I have a buffer for August because I have savings I can turn to.
If you’re just starting out on the adventure of money management, and haven’t quite got into the savings habit, here are a number of tools you can use to smooth out the peaks and troughs.
5 ways to plug a short term hole in your cash flow
1. Spread out the costs
It may be possible to pay for the item over a period; you can pay your car insurance, for example, by monthly direct debit. You may end up paying more than if you were to hand over the total fee up-front, but by spreading the cost you’ll know how much and when you need to pay and can budget appropriately, avoiding the need to get into debt.
2. Borrowing from a family member
A parent or sibling may be in a position to lend you what you need to get over the hump. Often, the family member won’t expect you to pay interest on the loan.
TIP: For the sake of family harmony, be clear about the terms of the ‘dig out’ before you accept it.
3. Using an overdraft facility
Not everything can be paid for in instalments – say you need to pay a roofer to repair a leak –consider setting up an overdraft. The set-up fee is affordable and while you will be charged interest* on the amount you’re overdrawn, every time you get paid or credit your account, you are presumably bringing it back into the black again.
TIP: Make sure to get approval for the overdraft with your bank or building society as unauthorised overdrafts are subject to penalties.
*Overdrafts usually have a ‘facility fee’ set-up charge and then interest from 9.5% upwards on the overdrawn amount.
4. Short term loan
While interest will apply (for €2,000, payable over 12 months, you could pay between 11 and 15% APR*), the advantage of a short-term loan over a credit card is that you are tied into making fixed repayments and there is a clear end in sight. With a credit card, you can fall into the trap of paying back the minimum amount and the debt could end up being expensive and long-term.
TIP: Don’t go near money lenders, no matter how convenient they seem. Banks and credit unions will have a loan agreement which protects you as well as them and you have statutory recourse should you have a complaint
5. Using a credit card
If you can predict your income (by which I mean you get paid the same amount every month) and you know that next month you’ll be back on track again, you can lash the extra expenditure on your flexible friend. However, as soon as you get your bill, pay off the full amount.
TIP: Going on holiday? Put your credit card in credit to the tune of your holiday budget, then spend away in the sun or on the slopes, happy that you’re not going into debt. Were you to use your debit card, say, other bills could be coming out of your current account while you’re away and you could come back to a large, unexpected, hole in your finances. The credit card is a good way to ‘ring-fence’ your holiday spending money.
These are just some strategies to smooth out any spikes in your outgoings as you get into the swing of actively managing your money. My big hope, of course, is that after a few months of budgeting, you’ll have banked enough to pay the car insurance upfront and in full, cover Christmas, replace the roof or manage whatever big expense you are met with.
If you find yourself faltering at the thought of opening the Pandora ’s Box of your household finances, contact us at The Money Advisers. We’ll be happy to transform you into the new budgeting you.